India Facing Inflation `Surge,' Subbarao Says Before Interest-Rate Policy
“We recovered from the crisis sooner than other countries but inflation also caught up sooner,” Subbarao said in a speech in Mumbai today, referring to the global financial crunch. “A lot of other countries are still flirting with deflation. On the other hand, we have a surge in inflation.”
Benchmark nine-year government bond yields rose four basis points after Subbarao’s comments, extending a gain of 34 basis points since Jan. 1. Inflation has become a top political issue in India, forcing Prime Minister Manmohan Singh’s government to turn to Pakistan for import of onions, a staple in Indian cuisine, and keep a ban on exports of edible oils and lentils.
“Inflation management will be a priority for the Reserve Bank of India in the coming months due to strong pressure from food and global commodity prices,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai.
The yield on the 7.8 percent bond due 2020 was at 8.24 percent as of 3:05 p.m. in Mumbai. The rupee weakened 0.5 percent to 45.58 against the dollar, while the Bombay Stock Exchange’s Sensitive Index fell 0.1 percent.
By contrast, the Bank of Japan has kept the overnight call rate target in the range of zero percent to 0.1 percent since October and has been buying assets to spur growth and stamp out deflation, or an extended drop in prices.
India’s inflation is accelerating because of higher food costs. The benchmark wholesale-price index rose 8.43 percent in December from a year earlier after a 7.48 percent gain in November, the commerce ministry said on Jan. 14.
An index of primary articles that includes food items such as fruits and vegetables rose 3.5 percent in December, the ministry said. Manufacturing inflation quickened by 0.4 percentage point last month. Onion costs surged 70 percent in the week to Jan. 1, according to the ministry.
The import of onions from Pakistan will help cool prices, the prime minister’s office said in a statement on Jan. 13, adding the government will review import and export policies for all “essential commodities” to improve supplies. Overseas sale of edible oils, pulses and non-basmati rice will “remain banned,” the statement showed.
Onion prices have soared as the late arrival of rains hurt crops, the statement said.
The main opposition Bharatiya Janata Party, or BJP, will hold demonstrations and stage sit-ins in India’s major towns for a month starting Jan. 20 to highlight the government’s failure to check price increases, party spokesman Ravi Shankar Prasad said in New Delhi on Jan. 11.
The World Bank said Jan. 12 that economic growth in South Asia, including India, may slow as the region’s governments tighten fiscal and monetary policies to fight inflation.
India, the region’s largest economy, will grow 8.4 percent this year and 8.7 percent in 2012, down from 9.5 percent last year, the bank said.
“We still have to be concerned about supportive recovery,” Subbarao said. “So, the challenge for the RBI is to calibrate monetary policy, taking into account the demands of inflation management and the demands of supportive recovery.”
To contact the reporter on this story: Anoop Agrawal in Mumbai at firstname.lastname@example.org.