Credit rating agency Standard & Poor’s (S&P) has projected that India’s consumer price increases are likely to come down next year because of monetary tightening by the central bank. In a quarterly assessment of the Asia-Pacific region, S&P has estimated that consumer prices will increase in the range of 5-5.5 per cent, down from this year’s level of 8.5-9 per cent.
The Reserve Bank of India (RBI) had increased its interest rate by 125 basis points (one basis point is one-hundredth of a percentage point) in two stages in June and July this year. This led the benchmark repo (repurchase) rate to touch 8.5 per cent.
The central bank also increased the cash-reserve ratio (CRR), the quantum of money commercial banks keep with it, by 75 basis points in June. As banks were required to deposit more money with the central bank, it curtailed liquidity.
Commenting on the rate hikes, S&P said, “High inflationary pressures warrant a tightening monetary stance.” It further added, “Continuing inflationary pressures indicate persistence of the tight monetary stance. Growth is slowing slightly, but the main concern is the worsening fiscal situation as subsidies are used to suppress inflation”.
India’s real Gross Domestic Product (GDP) —the sum of all goods and services produced in the country — growth has been projected at 7.3-7.8 per cent in 2009, and for the current year between 7.5 per cent and 8 per cent. This is lower than the 9 per cent growth last year.
The report adds, “High interest rates and rising inflation are expected to hinder consumer spending and corporate investments in 2008 and 2009.”
Commenting on the Asia-Pacific region, S&P Asia-Pacific Chief Economist Subir Gokarn said the threat to growth had moved away from a slowdown in the world’s largest economy, the United States of America, to inflationary pressures and the steps taken by central banks to tackle inflation.