Persistent price gains may require an interest-rate increase in India this month, Chakravarthy Rangarajan, the prime minister’s top economic adviser, said as food inflation and exports climbed.
“There are still three more weeks before the monetary policy action and the Reserve Bank of India should watch the behavior of the prices,” Rangarajan, 78, chairman of the Prime Minister’s Economic Advisory Council, said in an interview yesterday in Gurgaon, near New Delhi. “If prices continue to remain sticky, then probably some action will be required.”
India’s exports climbed 36.4 per cent to $22.5 billion in December, Trade Secretary Rahul Khullar said in New Delhi today. Food inflation accelerated 18.32 per cent in the week ended December 25, the fastest pace since July, a report showed on January 6.
Prime Minister Manmohan Singh’s government is under pressure to curb rising costs, including those of vegetables such as onions, a key ingredient in local cuisine. India’s nine-year government bond yields surged to the highest level in a month yesterday on speculation RBI would raise borrowing costs.
“The upside risks to inflation have increased in recent weeks after the surge in food prices,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd, the local unit of Standard & Poor’s Ratings Services. “Inflation is a huge political risk and policy makers will go all out to damp it.”
Next meeting
Joshi expects the central bank to increase rates by a quarter-point in its next monetary policy meeting on January 25. RBI’s benchmark repurchase rate is 6.25 per cent.
Governor Duvvuri Subbarao, who raised rates six times in 2010, the most in Asia, held off on boosting borrowing costs in the last policy statement on December 16 as a record Rs 1.1 lakh crore ($24.2 billion) of share sales by companies including Coal India Ltd caused a cash squeeze at lenders.
RBI’s open-market operations and government spending have improved availability of cash in the banking system and the monetary authority can change its bond repurchase target depending on liquidity, Deputy Governor Shyamala Gopinath told reporters in the northern Indian city of Udaipur today.
The central bank would review interest rates and inflation estimates at its meeting later this month, she said.
The yield on the benchmark 7.80 per cent bond due in May 2020 rose seven basis points to 8.20 per cent as of the 5 pm close in Mumbai yesterday. The Bombay Stock Exchange’s Sensitive Index, which was the best performer among the world’s 10 biggest equity markets in 2010, fell 2.4 per cent while the rupee declined 0.3 per cent to 45.38 against the dollar.
Spending power
In the past 15 years, Indians have voted out at least two national governments after inflation eroded the spending power of the poor. The World Bank estimates 828 million Indians live on less than $2 a day. Inflation of more than six percent between 1994 and 1996 helped oust Prime Minister
P V Narasimha Rao. His Congress party-led government lost to the Bharatiya Janata Party, which was voted out in May 2004 after prices rose in eight of the 12 months that preceded the poll.
Singh wants to curb inflation ahead of elections in nine states over the next 18 months including in the northern province of Uttar Pradesh, which sends a seventh of all lawmakers to the national parliament.
