Reserve Bank of India Says ....

India's Central Bank Says Inflation `Major Concern'

Jan. 28 (Bloomberg) -- India's central bank said inflation has emerged as a ``major concern'' amid strengthening consumer demand, signaling the possibility of raising borrowing costs.

``In India, recovery has coincided with a significant build up of inflationary pressures,'' the Reserve Bank of India said in a report on the economy before the monetary policy announcement in Mumbai tomorrow. ``In December 2009, there have been signs of emergence of generalized inflation.''

The central bank said inflation, currently stoked mainly by food prices, runs the risk of ``getting transmitted'' to industrial goods and services as wages rise. Economists expect Governor Duvvuri Subbarao to drain cash from the economy by ordering lenders to keep a higher proportion of their deposits with the central bank.

``We expect the central bank to focus on managing liquidity and tempering inflation expectations,'' Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai, said before the report. Rao says the cash reserve ratio may be increased by 50 basis points and the benchmark interest rates kept unchanged tomorrow.

Raised Ratio

The central bank has kept the cash reserve ratio at 5 percent since January 2009. It has kept its benchmark reverse repurchase rate at 3.25 percent and the repurchase rate at 4.75 percent since April.

In the last monetary policy in October, the Reserve Bank ordered lenders to keep a higher proportion of their deposits in government bonds by raising the statutory liquidity ratio to 25 percent from 24 percent.

``While anchoring inflation expectations becomes important in such a situation, addressing supply constraints would be critical for enhancing the effectiveness of any anti-inflationary policy measures,'' the bank said in the report.

India's benchmark wholesale-price inflation accelerated to 7.3 percent in December, the fastest pace since November 2008. Food accounted for 80 percent of December's inflation reading, government data showed, as deficient rains last year hurt output of rice, wheat and sugar. The central bank in October predicted inflation to touch 6.5 percent by March 31.

The government on Jan. 13 announced plans to sell as much as 3 million metric tons of wheat and rice in the open market until March and permit duty-free imports of white sugar until Dec. 31 to increase supplies.

Tame Prices

As the government tries to tame food prices, manufacturing inflation is also showing signs of accelerating.

Manufactured-goods inflation surged to 5.2 percent in December from 1.6 percent in October as consumer demand rose. Industrial production rose 11.7 percent in November, the fastest pace in two years.

Tata Steel Ltd., India's biggest producer, Steel Authority of India Ltd., and JSW Steel Ltd. raised prices this month on higher demand. Higher input costs prompted Maruti Suzuki India Ltd. and the Indian unit of Hyundai Motor Co. to increase prices of some of their cars.

India's $1.2 trillion economy may grow 6.9 percent in the year ending March 31, according to the median estimate of a survey conducted in December of forecasters such as the New Delhi-based National Council of Applied Economic Research. The median forecast in the survey in September was for a growth of 6 percent, the central bank report said.

-- Editors: Stephen Foxwell

To contact the reporter on this story: Cherian Thomas in Mumbai at cthomas1@bloomberg.net .