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Rajan in India Rate Dilemma as CPI Tops 11% Amid Growth Woes

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RBI Governor Raghuram Rajan
Raghuram Rajan, governor of the Reserve Bank of India. Photographer: Dhiraj Singh/Bloomberg

Dec. 13 (Bloomberg) -- India’s consumer-price inflation exceeded 11 percent last month, adding pressure on central bank Governor Raghuram Rajan to raise interest rates again next week even as industrial output slid more than expected.

Consumer prices rose a more-than-estimated 11.24 percent in November from a year earlier, official data yesterday showed. That prompted brokerages from Nomura Holdings Inc. to DBS Group Holdings Ltd. to revise their interest rate forecasts, with most economists in a Bloomberg survey now expecting Rajan to increase the benchmark repurchase rate to 8 percent from 7.75 percent in a decision due Dec. 18.

“We are very uncomfortable with the current level of inflation,” Rajan, who has increased the policy rate by 50 basis points since he took over the Reserve Bank of India in September, told reporters yesterday. “Clearly growth is weaker than we would like, inflation is higher than we would like. It would be wonderful if we had the normal situation of extremely high growth and high inflation and extremely low growth and low inflation, in which case policy is very easy.”

The central bank’s push to stem price increases has damped spending in the world’s second-most populous nation, with another report yesterday showing industrial production slid 1.8 percent in October, the first contraction in four months. Prime Minister Manmohan Singh also faces pressure to curb government expenditure on subsidy programs ranging from fuel to food to avert a credit-rating downgrade to so-called junk status.

‘No Choice’

“The central bank has been with left no choice but to tighten interest rates,” said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai. “Production has slowed so much, yet prices are not coming down.”

The inflation reading exceeded the median estimate of 10 percent in a Bloomberg News survey, while the contraction in factory output topped the median forecast of a 1.2 percent decline. Nine of 17 economists in a Bloomberg survey expect the central bank to raise the repurchase rate next week to 8 percent, while the rest see it left unchanged.

Yesterday’s data “paint a stagflationary picture of the economy where despite weaker growth, inflation remains elevated due to supply-shocks,” Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai, wrote in a research note today, adding that she now expects the RBI to raise the repurchase rate by 25 basis points at the Dec. 18 policy meeting.

Rupee Falls

The consumer-price gauge was created in January 2011 and the government began publishing a year-on-year rate from 2012. The index is now climbing at the fastest pace in the Group of 20 major economies, according to data compiled by Bloomberg.

Wholesale prices rose 7 percent in November from a year earlier, the same pace as October and the highest since February, according to the median estimate in a Bloomberg News survey before a report due Dec. 16.

“We are aware of the weak economy, but we also have to take into account inflationary pressures,” Rajan said.

The rupee, which has slid 12 percent against the dollar in the past 12 months, weakened 0.5 percent to 62.135 at 12:17 p.m. in Mumbai. The S&P BSE Sensex index fell 0.8 percent. The yield on the 10-year government bond maturing November 2023 rose to 8.9 percent from 8.85 percent yesterday.

India’s main opposition Bharatiya Janata Party won four of five state elections held over the past five weeks, giving it momentum ahead of a national vote due by May. The stock market hit an all-time high this week after the results as investors bet on the ouster of Singh’s decade-old administration, which last fiscal year oversaw the slowest annual growth since 2003.

Political parties must work together to ensure the government that emerges after polls can pass measures necessary to boost economic growth, according to Rajan.

Growth

India’s economic expansion accelerated to 4.8 percent last quarter, spurred by higher exports. That expansion faces risks from the need to raise interest rates further to contain the cost of living in the nation of 1.2 billion people, about two-thirds of whom live on less than $2 per day.

Goldman Sachs Group Inc. predicts Rajan will boost the repurchase rate to 8.5 percent in 2014.

Slower Indian growth has hurt companies such as Maruti Suzuki India Ltd., India’s largest carmaker. Maruti’s sales fell 10.7 percent in November. The economy will expand 5 percent in the year ending March, the RBI forecasts.

To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editor responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net

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