Rajan Won’t Raise India Rate If Prices Soften, Adviser Says

Reserve Bank of India Governor Raghuram Rajan will avoid further increases to the benchmark interest rate if inflation fell in December, and may even have room for a reduction, according to a central bank adviser.

“If inflation softens or doesn’t rise more, we won’t see a rise in rates,” Ashima Goyal, a member of the RBI’s technical advisory committee, which makes recommendations to Rajan on monetary policy, said in a phone interview yesterday. “If inflation falls, we could see a cut,” she said, without specifying how much prices need to drop in that scenario.

Rajan surprised economists last month by holding the benchmark rate at 7.75 percent instead of adding to increases totaling 50 basis points since taking over the RBI in September. Consumer-price inflation climbed to 11.24 percent in November, the highest among 17 Asia-Pacific economies tracked by Bloomberg, even as growth holds near a decade low.

The rupee declined 11 percent last year, adding to price pressures as the cost of imports such as crude oil increased. The currency is expected to stay around current levels with volatility constrained after the RBI built up reserves, said Goyal, one of five external members on the seven-person RBI committee advising on monetary policy.

Most Indian stocks rose today, led by property companies. Godrej Properties Ltd. jumped 10 percent as of 1:50 p.m. in Mumbai, leading the S&P BSE Realty Index to a five-month high. The S&P BSE Sensex index of shares was little changed. The rupee fell 0.1 percent to 61.885 per dollar, while the yield on the 10-year government note was little changed at 8.83 percent.

Onion Prices

Consumer-price inflation probably softened in December as prices of onions and other vegetables fell, Goyal said. Gains in consumer prices may average 8 percent in 2014, she said.

“The current inflation surge is likely to be a temporary peak,” Goyal said. “If inflation comes down, the tightening cycle will definitely be over because production is very low.”

The central bank’s next rate decision is due on Jan. 28. Wholesale inflation in November was 7.52 percent, a 14-month high, as onion prices tripled from a year earlier.

“The outlook for the economy has improved, with export growth regaining momentum, but growth is still weak,” Rajan said in the foreword to the RBI’s twice-yearly report on financial stability released on Dec. 30. “The challenges of containing inflationary pressures limit what monetary policy can do.”

Demand Improving

To sustain a reduction in food prices, officials must make it easier to transport farm goods across states and allow companies and retailers to directly purchase perishable goods like fruits and vegetables from farmers, Goyal said.

Monetary policy decisions will also be guided by the economic growth outlook and recommendations of a central bank panel on overhauling the monetary policy framework, Goyal said.

“Growth seemed to have bottomed out,” Goyal said. “Demand seems to be improving domestically and exports are looking up.”

Rajan, 50, unexpectedly raised the repo rate by a quarter point in his first policy review on Sept. 20 and boosted it again by 25 basis points on Oct. 29. He’s lowered the marginal standing facility rate to 8.75 percent from 10.25 percent, the level reached when his predecessor boosted it 200 basis points on July 15 to curb the supply of rupees.

The central bank predicts India’s economy will 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. Factory output fell 1.8 percent in October from a year earlier.

Before it's here, it's on the Bloomberg Terminal.