Indian interest rates will remain elevated as long as surging inflation imperils economic growth, a deputy governor of the country’s central bank said.
“If you are having continuously high inflation, it will kill your growth,” the Reserve Bank of India’s K.C. Chakrabarty told Bloomberg TV India yesterday. “If interest rates are high, that’s because inflation is high, and unless inflation is brought down, interest rates will not come down.”
Governor Raghuram Rajan is seeking to quell consumer inflation of more than 11 percent, the highest in the Group of 20 major economies, as bottlenecks in the supply of everything from food to energy stoke price increases. He surprised economists last month by holding the benchmark repurchase rate at 7.75 percent instead of adding to increases totaling 50 basis points since taking over the RBI in September.
“Inflation is likely to remain elevated this year as well and may average over 9 percent,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai, who expects Rajan to raise the key rate by 25 basis points at the next policy meeting on Jan. 28. “Continuing price pressures will leave the RBI with no choice but to raise the repurchase rate.”
Ashima Goyal, a member of an RBI committee that makes recommendations to Rajan on monetary policy, said in an interview earlier this week that he will avoid further increases to the repo rate if inflation fell in December, and may even have room for a reduction. She didn’t specify how much prices need to drop in that scenario.
Consumer prices climbed 11.24 percent in November. Wholesale inflation was 7.52 percent, a 14-month high, as onion prices tripled from a year earlier.
“We have to improve the productivity, efficiency, distribution system, and, at the same time, keep our monetary policy such that demand factors should not play a role,” Chakrabarty, 61, said in the interview in Mumbai.
A weaker rupee is among the causes of Indian inflation, with the currency down about 12.5 percent against the dollar in the past year. The yield on the 10-year government bond has climbed to 8.84 percent from about 8 percent in the same period.
“The depositor has to be given a higher return than inflation, otherwise he will not save money,” said Chakrabarty, who has been an RBI deputy governor since 2009.
Prime Minister Manmohan Singh’s government has struggled to stem a decline in India’s savings and investment ratios.
Savings as a proportion of gross domestic product fell to 30.6 percent in 2013 from 36.8 percent in 2007, according to International Monetary Fund estimates. Investment dipped to 35 percent from 38.1 percent.
Chakrabarty said the RBI is concerned about non-performing assets in the banking industry. At the same time, he added that “if you say the system is going to collapse because of this NPA, the answer is no.”
The risk to India’s banking industry rose in the six months through September as bad loans surged and profitability slumped, the central bank said in a Dec. 30 report. The average gross bad-loan ratio may reach 4.6 percent of total lending by September 2014 from 4.2 percent as of Sept. 30, it said.
The $1.8 trillion economy will probably expand 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade, according to central bank estimates.