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Subbarao Aims for Sub-5% Inflation as India’s Growth Weakens

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Aug. 29 (Bloomberg) -- India’s central bank chief said policy makers need to reduce the nation’s inflation rate by about 2 percentage points, underscoring limited scope to address weakening growth through interest-rate cuts.

“We need to bring it down to more acceptable levels of 5 percent or even less than 5 percent,” Reserve Bank of India Governor Duvvuri Subbarao said yesterday in a speech at Cornell University in Ithaca, New York. The benchmark wholesale-price index rose 6.87 percent in July from a year earlier.

India’s price pressures, exacerbated by infrastructure bottlenecks and a sliding currency, have kept the RBI from lowering borrowing costs since April even as growth in Asia’s third-largest economy careened to the second-slowest pace in at least seven years. The RBI next meets to set rates Sept. 17.

“The current inflation trend clearly limits any scope of monetary easing from RBI in the near term, even as growth remains weak,” Deutsche Bank AG economists Taimur Baig and Kaushik Das wrote in an Aug. 24 note. “It is now only up to the fiscal authorities to take steps for reviving investor confidence and growth.”

Prime Minister Manmohan Singh has seen his economic-liberalization agenda stymied by the government’s coalition allies, with initiatives from allowing overseas companies into multi-brand retailing to foreign investment in pensions frozen.

Rupee Drop

Investor disappointment has contributed to a 4.7 percent slump in the rupee against the dollar this year, the second-biggest drop in Asia, after Indonesia’s rupiah. The decline has added to inflation pressures, causing inflation to average more than 7 percent this year.

Subbarao left the benchmark repurchase rate unchanged in July at 8 percent for a second meeting, refraining from joining a wave of cuts in borrowing costs from China to Europe as the global recovery struggles.

“To control inflation we need to keep interest rates high, but to support growth we need to keep interest rates low,” Subbarao said. The “challenge is how do you calibrate interest rates.”

Food and energy costs have also added to escalating prices, and in yesterday’s remarks Subbarao attributed this partly to being a symptom of the nation’s increasing development.

Food Costs

India’s economic growth has fueled inflation in the price of food, Subbarao said. Rising incomes among the poorest citizens have prompted them to eat less grain and more protein from goods like milk and meat, raising prices. With 1.2 billion people, India can’t import food without causing a possible increase in global food prices, he also said.

“Structural inflation is a problem of India’s success story, specifically the growing income of the poorest sections,” Subbarao said.

Indians haven’t been able to take advantage of the decline in global commodity prices because the rupee has depreciated, he said. Oil prices also have made inflation difficult to predict. India imports 80 percent of its oil, he said.

“There are two opposing trends,” Subbarao said. “Oil prices soften because of slow recovery and could firm up because of quantitative easing,” or the purchase of bonds by central banks.

To contact the reporters on this story: Freeman Klopott in Ithaca, New York at fklopott@bloomberg.net Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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