Aug. 11 (Bloomberg) -- Indian Finance Minister Arun Jaitley backed the central bank’s moves to keep interest rates elevated to fight the highest inflation among Asia’s biggest economies as a weak monsoon threatens to damp growth.
“This is an issue which the Reserve Bank decides, and I am sure they factor in various circumstances,” Jaitley told reporters in New Delhi yesterday when asked if he agreed with central bank Governor Raghuram Rajan’s monetary policy measures announced on Aug. 5. It was the first formal joint media briefing by Rajan and Jaitley since Prime Minister Narendra Modi in May won India’s biggest electoral mandate in 30 years.
Rajan left interest rates unchanged at 8 percent for a third straight meeting while flagging risks to his goal of lowering consumer price inflation to 6 percent by January 2016. Elevated borrowing costs risk hurting Asia’s third-biggest economy as Modi banks on a jump in tax revenues to narrow the budget deficit to a seven-year-low.
Rajan, whose emphasis on fighting inflation spurred tension with former Finance Minister Palaniappan Chidambaram, plans to slow consumer-price inflation to below 8 percent in January 2015 and 6 percent in the next 12 months. The index has dropped for two straight months to 7.3 percent in June, the slowest pace since its creation in 2012.
“We are on course to meet those targets and, of course, if news comes on either side, we can change what the policy is,” Rajan told reporters while addressing the same press conference. “At this point, the uncertainty is two ways.”
In his monetary policy statement, Rajan said upside risks to inflation include the pass-through from government price support for crops, uncertainty over the monsoon and higher oil prices from geopolitical tension. Price pressures had eased due to both base effects and a steady deceleration in CPI excluding food and fuel, he added.
Monsoon rains, which account for more than 70 percent of annual rainfall and water about half of India’s farms, is the main threat to inflation. Rainfall was 17 percent below average as of Aug. 8, according to the nation’s weather office, putting India on pace for its driest year since 2009.
A crop failure can spur consumer prices in the world’s second-most populous nation, where food accounts for about 50 percent of the CPI basket. The government has sold 25 percent of its rice and wheat stocks in the domestic market since June, ordered a crackdown on hoarders and set minimum export prices on onions and potatoes to discourage overseas sales.
The central bank is in discussion with the government to approve a monetary policy framework that will adopt a formal CPI target, Rajan said. A Reserve Bank of India panel proposed adopting a 4 percent CPI target by 2016 plus or minus two percentage points as part of an overhaul that would also establish an independent monetary policy committee.
“Just now, we have started preliminary discussion but it will be discussed through the course of the year,” Rajan told reporters. “The framework will be developed by the finance ministry.”
In a Facebook post last week, Jaitley said inflation was moderating and restated a commitment to narrow the fiscal deficit.
Jaitley said plans to narrow the fiscal deficit were on course. Recent data was skewed as there were outstanding debts to be paid from previous year’s budget and tax collections haven’t picked up. The government plans to curb the shortfall to 4.1 percent of gross domestic product in the year through March 2015 from 4.5 percent in the previous 12 months.
The target is “over-optimistic,” Thomas Rookmaaker, an analyst at Fitch Ratings Ltd., said in a July 31 conference call. India’s April-June budget deficit was 56.1 percent of the full-year target, the Controller General of Accounts said in a July 31 statement.
“The percentages and the month need not tally -- it evens out as the year proceeds,” Jaitley said. “The tax collections, particularly direct taxes, has not yet begun. That will show its first impact in September.”
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