FM warns central banks on rate hikes

Finance Minister P Chidambaram warned that central banks should be cautious when raising interest rates because inflationary pressures were supply driven.

"Inflationary pressures across regions are primarily supply driven by oil and commodity prices," Chidambaram said in a speech at a meeting of the World Bank and International Monetary Fund (IMF) in Washington on Sunday.

"We, therefore, believe that the reversal of interest rates by central banks should be, and will be undertaken cautiously.

"Growth and price stability cannot be viewed as two irreconcilable goals," he said in the speech, a copy of which was received on Monday.

Central banks around the world have raised interest rates in the past few months amid an upturn in the economic cycle.

The US Federal Reserve has raised interest rates three times so far this year.

Bond traders and analysts have been expecting the Reserve Bank of India (RBI) to raise interest rates off a three-decade low as inflation, spurred by global oil prices, remains near 8 per cent.

But Chidambaram told Reuters in a recent interview that the government would not do anything to disturb India's nascent investment-led recovery. India's wholesale price inflation eased marginally to 7.80 per cent in the year to September 18 after hitting a 3-1/2-year high in late August.

Meanwhile, the annual meeting of World Bank and IMF failed to arrive at a consensus in giving more powers to developing countries in decision-making besides increasing aid flow for reducing poverty.

The IMF managing director Rodrigo De Rato and World Bank President James Wolfensohn told a press conference that "there is no consensus yet on three issues of vital importance to developing countries."

"All these issues require political consensus, which was lacking," they said. The third issue pertains to trade, especially providing increased market access to developing countries.

Rato however said it was essential that "we continue to find ways to guarantee that the voices of all our member governments are heard."

Wolfensohn hoped that the consensus will develop or begin to develop by the time of the April session of the International Monetary and Finance Committee and Development Committee. The number of seats for different groups and their quota or shareholding are decided in the IMF, and the formula is followed by the World Bank, he said.

On issues like increase in aid, Rato said there have to be very fruitful discussions both formally and informally. He hoped that the discussions will bring about a consensus.

The issue of greater representation and more shareholding for developing countries, he said, is a very important issue that affects the legitimacy of the institution.

It has to be addressed by the shareholders. There is need for a political consensus. Rato indicated that in future the imf will say "no" to a country in trouble which is not observing the rules, with greater frequency than before.

At the annual session of finance ministers of member countries, he said saying "no" and declining to provide financial support would strengthen the incentives to implement sound policies, thus avoiding the need for fund support in the first place."