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Subbarao Says India Inflation Still High Two Weeks Before Review

Inflation in India still remains high while growth has moderated, Reserve Bank of India Governor Duvvuri Subbarao said today, about two weeks before reviewing interest rates that he has refrained from cutting since April.

“Growth has moderated certainly; at the same time inflation is still high,” Subbarao told reporters after the central bank’s board meeting in the eastern Indian city of Kolkata. “We are expecting that inflation will trend down” in the January-March quarter, he said.

The central bank held interest rates for a fourth time at its last meeting on Oct. 30, citing price pressures and resisting calls from Finance Minister Palaniappan Chidambaram to reduce borrowing costs. Gross domestic product rose 5.3 percent in the quarter ended Sept. 30, matching a three-year low recorded six months earlier. Moderating economic expansion prompted the government to start a policy overhaul in September, including curbing fuel subsidies and allowing foreign investment in retail and aviation.

“The RBI has given a fair degree of guidance that the next set of easing could come next quarter,” Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd., said in a telephone interview. The central bank may cut the repurchase rate by 50 basis points in the three months ending March 31, she said.

Calibrating Policy

The yield on the benchmark 8.15 percent bonds due June 2022 was little changed at 8.17 percent at the 5 p.m. close of trading in Mumbai. The rupee strengthened 0.8 percent to 54.1375 per dollar, while the benchmark BSE India Sensitive Index of stocks gained 0.5 percent.

“As we go into our mid-quarter policy on Dec. 18 and our quarterly policy on Jan. 29, we will take into account the growth, inflation trajectory and calibrate our monetary policy accordingly,” Subbarao said.

Chidambaram, who is counting on faster economic growth for higher revenue and plugging a budget shortfall, told reporters on Oct. 30 that “if the government has to walk alone to face the challenge of growth, we’ll walk alone” after Subbarao resisted his calls for lower borrowing costs.

Food costs and supply bottlenecks have stoked prices, limiting India’s room to join nations such as Brazil and the Philippines in further cutting borrowing costs as global growth falters. The International Monetary Fund forecasts India’s GDP will rise 4.9 percent in 2012, the least in a decade, following a moderation in investment.

Retail Decision

India has the fastest inflation and the widest fiscal gap in the BRIC group of largest emerging markets that also includes Brazil, Russia and China. Inflation as measured by the wholesale-price index was 7.45 percent in October while consumer prices climbed 9.75 percent.

“We in the Reserve Bank are always trying to manage the balance between growth and inflation,” Subbarao told reporters today.

The central bank hasn’t yet studied the impact the government’s decision to allow foreign retailers including Wal-Mart Stores Inc. and Carrefour SA will have on economic growth and inflation, he said.

Indian lawmakers endorsed in parliament’s lower house yesterday the government’s decision to allow foreign investment in retail, bolstering Prime Minister Manmohan Singh’s efforts to boost growth. A key regional party today said it will vote in the government’s favor on the measure in the upper house tomorrow, taking Singh a step closer to victory after earlier attempts stalled due to opposition from his then biggest ally.

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