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Tuesday, July 27, 2010

India Needs Tight Monetary Policy


India Needs Monetary Steps to Cool Inflation, Central Bank Says

July 27 (Bloomberg) -- India needs tighter monetary policy to cool inflation, the central bank said, signaling the possibility of an interest-rate increase today.

"For containing the inflation persistence and anchoring inflation expectations, anti-inflationary monetary policy actions become a necessity," the Reserve Bank of India said in a report yesterday before Governor Duvvuri Subbarao's rate decision at 11:30 a.m. in Mumbai today.

India's key wholesale-price inflation rate has stayed above 10 percent since February and the opposition plans to attack Prime Minister Manmohan Singh's government in parliament over the issue. Prices may rise further after Singh on June 25 allowed state-run refiners, including Indian Oil Corp., to raise fuel costs.

"An increase in interest rates today is a done deal," said Dharmakirti Joshi, chief economist at Mumbai-based Crisil Ltd., the Indian unit of Standard & Poor's. "High inflation persisting for many months will trigger political protests."

The Reserve Bank will probably raise its reverse-repurchase rate by a quarter-percentage point to 4.25 percent, all 20 forecasts in a Bloomberg News survey showed. It will raise the repurchase rate to 5.75 percent from 5.5 percent, according to all but one analyst, who expects it to be kept unchanged.

Subbarao has increased the central bank's benchmark rates three times since mid-March by a quarter-point each.

Stocks, Bonds

The yield on the 10-year Indian government bond slid one basis point to 7.67 percent at the 5:30 p.m. close in Mumbai yesterday and the rupee fell 0.2 percent to 47.05 against the dollar. The Bombay Stock Exchange's Sensitive Index dropped 0.6 percent.

The wholesale-price inflation rate rose 10.55 percent in June after climbing 11.23 percent in April, a 19-month a high, according to government data.

"Inflation will dominate house proceedings and we will seek an explanation from the government," said S.S. Ahluwalia, a lawmaker from the opposition Bharatiya Janata Party.

Inflation may average 8.6 percent in the year ending March 31, according to forecasts that the central bank compiled from agencies including the International Monetary Fund and the Asian Development Bank. The survey in April projected an average inflation rate of 7 percent.

Faster Growth

The economy is likely to expand 8.4 percent in the current financial year, the survey showed, compared with an 8.2 percent estimate three months ago.

"With receding concerns relating to the recovery and given the emerging risks of generalized inflation, monetary policy measures have to continue the calibrated normalization process," the RBI said.

The manufactured-price inflation rate, the RBI's gauge for consumer demand, accelerated to 7.3 percent in June, from near zero in November, and "is above the comfort level," the central bank said in its report.

"Pressure is mounting on the RBI to raise rates," Jahangir Aziz, chief India economist at JPMorgan Chase & Co. in Mumbai, said before the report. "Inflation is the biggest risk that policy makers need to be worried about."

One of the elements stoking inflation is fuel prices. The government permitted state-run refiners to raise gasoline and diesel costs to cut its subsidy bill.

The finance ministry estimates the move will boost the inflation rate by about a percentage point.

Moody's Investors Service yesterday said that the fuel- price decision will help the government cut its budget deficit. Moody's raised India's local-currency debt rating by a level to Ba1, the highest non-investment category.

"The monetary unwinding that started in October 2009 should continue till inflation expectations are firmly anchored and inflation is brought down," the RBI said.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net





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