Rajan Eyeing Food Inflation Impacts Before India Rate Review

  • Indian central bank wants to avoid `wage hike spiral'
  • Containing wages may result in slower activity at times

India’s central bank is looking to contain the broader effects of a surge in food prices, Governor Raghuram Rajan said less than two weeks before his final policy review for 2015.

The challenge is to avoid a “wage hike spiral” that would result from higher food costs, which make up about half of India’s consumer prices basket, he said in remarks in Hong Kong on Friday. Other prices have to adjust to avoid that situation, even if that means curbing growth.

“We are not really targeting that first round effect on food, we are worried about the second round effect on wages and trying to make sure that is contained, if unfortunately that sometimes means slower activity,” Rajan said.

He’s due to review rates on Dec. 1 as inflation accelerates under pressure from surging prices of lentils and onions. Data last week showed consumer prices rose 5 percent in October, matching Rajan’s target for March 2017, and inflation expectations have ticked up in recent quarters, a key obstacle in his fight to bring the gauge toward 4 percent by 2018.

Bonds Drop

Indian government bonds extended losses, with the yield on the benchmark note due May 2025 rising three basis points to 7.70 percent as of 10:56 a.m. in Mumbai, the highest level since Nov. 9. Swaps indicate Rajan will leave rates unchanged for the rest of 2015, a view echoed by most economists in a Bloomberg survey published last month.

Rajan lowered interest rates four times to 6.75 percent this year, aided by a slump in global commodity prices. In a Nov. 3 interview, he said the 5 percent inflation goal can be met with the current monetary stance, which is “just right” at the moment.

Rajan also said the main concern with Asia’s third-largest economy is the weakness of investment, though the government got the public side of it back on track.

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