Local banks in India are joining Goldman Sachs in predicting benchmark borrowing costs would climb one percentage point in 2011 before a report this week forecast inflation accelerated for the first time in three months in December.
Wholesale prices, the benchmark gauge, gained 8.4 per cent from a year earlier, faster than the 7.48 per cent rate in November, according to the median forecast of 29 economists in a Bloomberg survey before data due on January 14.
Axis Bank, the nation’s fourth-largest lender by market value, raised its forecast from 75 basis points (bps) yesterday. Yes Bank made the same adjustment last week.
One-year interest-rate swaps in India have climbed 34 bps, or 0.34 percentage point, in the past month, the most among the so-called BRIC economies of the largest developing nations, reflecting expectations the Reserve Bank of India will raise rates as soon as this month. Prime Minister Manmohan Singh is under pressure to curb inflation as his party faces elections in nine states over the next 18 months.
“The dramatic change in the inflation trajectory prompted us to revise our call to a more hawkish one,” said Shubhada Rao, a Mumbai-based economist at Yes Bank. “Inflation is like a ubiquitous tax, and the government will be under pressure to get inflation under control as early as possible.”
Food prices
Food prices surged 18.3 per cent in the week ended December 25, the most since July, according to a Commerce Ministry report issued on January 6. The annual wholesale inflation rate, which touched 11 per cent in April, fell in both October and November.
The central bank will review borrowing costs next on January 25 after raising the benchmark repurchase rate six times last year.
Any increase in the cost of food “feeds into the rest of the sectors in the economy,” Chakravarthy Rangarajan, the prime minister’s top economic adviser, said in an interview on January 7. If prices remain “sticky, probably some action will be required,” said Rangarajan, who led the Reserve Bank between 1992 and 1997.
Tushar Poddar, a Mumbai-based economist at Goldman Sachs who correctly predicted the central bank would raise the benchmark repurchase rate by 150 bps in 2010, said the biggest risk to inflation was higher food and commodity prices. On December 8, Poddar had said he expected the central bank to lift interest rates by 100 bps in 2011.
The yield on India’s 10-year bonds has risen 33 bps this year. The rate on the most-traded 7.8 per cent security due in May 2020 climbed two bps to 8.22 per cent yesterday.
