India will take several months to reduce inflation to “an acceptable level,” and the central bank’s interest-rate increases haven’t hurt the economy, Prime Minister Manmohan Singh’s top economic aide said.
“We will bring inflation down in control but it will take several months,” Montek Singh Ahluwalia, the deputy chairman of India’s planning commission, said in an interview in New Delhi late yesterday. “As of now, there has been no collateral damage at all” to growth from rate rises, the economic adviser, 67, said before next week’s central bank policy meeting.
India has persisted with the most aggressive monetary tightening among Asia’s major economies even as regional neighbors from Malaysia to the Philippines held rates in recent weeks to protect growth. Indian policy makers need to worry about the economic cost only if the expansion dips below 8 percent, versus the 8.25 percent pace estimated for the fiscal year through March, Ahluwalia said.
“As inflation continues to be uncomfortably high, the Reserve Bank of India looks set to hike rates next week,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore. “The government is very keen on winning the fight against inflation and alarmed by the persistence of the near-10 percent rates of price increases.”
India’s 10-year government bond yield rose two basis points to 8.28 percent as of 9:07 a.m. today, according to the central bank’s trading system. The yield has climbed 27 basis points since April 1, the start of the fiscal year, as the Reserve Bank extended its longest stretch of monetary tightening in a decade. Suryanarayanan expects a 0.25 percentage-point boost in benchmark interest rates on July 26.
Central bank Governor Duvvuri Subbarao, who has raised borrowing costs 10 times since mid-March 2010, will elevate the repurchase rate to 7.75 percent from 7.5 percent next week, according to 13 out of 15 economists in a Bloomberg News survey, with two predicting no change.
The nation’s benchmark wholesale price inflation accelerated to 9.44 percent in June and has stayed above 8 percent since December 2009.
“Inflation in India at the moment is above an acceptable level,” Ahluwalia said. “What the government has been doing and what the RBI has been doing, slowly tightening on the monetary front, is entirely the right thing to do.”
The planning commission’s view is that a “steady 5 percent to 6 percent inflation rate” would be appropriate for India. Prime Minister Singh has said restraining consumer prices is the top agenda item for India’s policy makers as higher costs erode spending power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.
The government is doing its part to defuse price pressures by reducing the budget gap, and there’s no reason to believe that it won’t be able to meet its deficit target this year, said Ahluwalia, who has a masters in economics from Oxford University.
The South Asian nation will struggle to meet the fiscal-year target of 4.6 percent of gross domestic product because of slower growth, Chakravarthy Rangarajan, chairman of the prime minister’s economic advisory council, said last month. The budget shortfall was 4.7 percent of GDP in the previous year.
The finance ministry last week advised officials to cut spending on foreign travel, barred government purchases of new vehicles and cut the budget for conferences by 10 percent, to control expenditure.
India’s latest economic data show higher borrowing costs may have begun to damp consumer demand. Industrial output growth unexpectedly slowed in May, with production rising 5.6 percent from a year earlier, the least since August 2010.
The $1.4 trillion economy expanded 7.8 percent in the three months through March from a year before, the slowest pace since 2009, as manufacturing and services cooled. The benchmark stock index has dropped more than 8 percent this year and companies including Maruti Suzuki India Ltd. have reported declining sales.
“Monetary policy is now beginning to have an impact on growth,” said Joshi. “We need to wait for more data but in some cases there has definitely been an impact.”
Singh aims to accelerate India’s economic expansion to as much as 10 percent over two decades to cut poverty. He plans to spend about 13 percent of India’s 12.6 trillion rupees ($283 billion) budget this year on welfare programs for the poor.
“The poor are the hardest hit by inflation,” Ahluwalia said. “Bringing inflation down to 5 percent to 6 percent should be the government’s priority. We now feel the downturn is there and it will come down.”