India’s battle against spiraling inflation is not over yet, but more monetary tightening could put the brakes on growth in Asia’s third-largest economy, analysts have warned.
Late last week, the central bank told commercial banks to hike cash reserves to suck out excess money supply in an effort to cool inflation that has more than doubled in four months to touch a three-year high of 7.14 percent.
With some economists saying surging global food and other commodity prices could push India’s inflation to double-digits, taming prices has become the number one goal of the Congress-led government, which faces general elections within a year and a clutch of state polls in between.
Given the huge political importance of inflation and continued demand pressures, “we expect the bank will continue its tightening measures,” said Goldman Sachs economist Tushar Poddar.
POLITICAL STORM
The surge in inflation has come despite a string of aggressive tightening moves and stirred a political storm with India’s poor masses, whose support is vital at voting time, hardest hit.
Prakash Karat is chairman of the Communist Party of India-Marxist, which helps prop up the minority government in parliament. He called on Saturday for “urgent steps,” warning that “otherwise it’s going to be an explosive situation.”
The government has already slashed food duties and banned exports of lentils and other staples, and will not hesitate to further “sacrifice revenues to control prices,” Finance Minister Palaniappan Chidambaram says.
INDIA NOT ALONE
The government is also willing to accept slower growth to curb prices, he said last week, but added India is not alone in grappling with inflation.
Other nations, like giant neighbor China where inflation is running near 12-year peaks of eight percent, are also suffering as costs of wheat, rice, cooking oils, metals and other commodities march higher globally, he said.
The moves by policymakers would reduce prices, Chidambaram said on Friday. But he cautioned that no one should “expect miracles,” and urged patience.
Economists forecast that India’s central bank would take more anti-inflationary steps at its annual policy meeting on April 29, and warned the moves could further dent growth, already slowing under the impact of previous tightening.
RATE HIKES
Poddar predicted another quarter-point hike in the central bank’s main policy tool, the repo rate, which it uses to lend to commercial banks. The rate now is at 7.75 percent — a six-year high.
HSBC economist Robert Prior-Wandesforde said he too had “penciled in a 25 basis point increase” in the repo rate.
“The rate tightening is more likely to have bigger depressing effects” on growth than inflation, which “is really being driven by surging international commodity prices,” he said.
Some economists already forecast growth will fall as low as 7 percent in this fiscal year to next March from about 8.8 percent last year and 9.6 percent the previous year.
While 7 percent is still impressive by Western standards, the economy needs to expand much more strongly to haul hundreds of millions of Indians out of poverty, economists say.
TIGHTROPE WALKING
India’s HDFC Bank chief economist Abheek Baruah said the central bank was walking a fine line, warning the economy had reached a “tipping point” where more tightening “could drive us into a phase of prolonged slowdown.”
The best hope for lower inflation lay not with the central bank or the government, but with the monsoon — the rains which drench India from June to September and are vital for crops, economists said.
“We should pray for a good monsoon,” said Dharma Kriti Joshi, economist at Indian credit rating agency Crisil.
“Otherwise the food supply situation will get worse” and stoke inflation, Kriti said.
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