Mon, May 02, 2011 - Page 10 News List

India prepares for ninth raise in interest rates


India, which has the highest inflation of any large Asian economy, looks set this week to hike interest rates for a ninth time despite mounting concern over the impact of monetary tightening.

The central bank has raised rates eight times since March last year, albeit in gradual, quarter-point steps to minimize the impact on economic growth.

However, inflation has remained high and some economists expect Reserve Bank of India (RBI) policymakers to move more aggressively when they meet tomorrow.

“A 50-basis-point rate rise wouldn’t surprise me — inflation is proving stubbornly difficult to reduce,” said Deepak Lalwani, head of London-based India investment consultancy Lalcap.

“It’s time to step it up,” HSBC chief India economist Leif Eskesen said.

Others bet the bank will stick to its “slowly, slowly approach” and only hike by a quarter point as it seeks to balance growth and inflation concerns.

The RBI meeting comes after data last month showed inflation had surged to nearly 9 percent.

The Asian Development Bank has said controlling inflation must be the Asian region’s top priority as strong growth, turmoil in the Middle East and Japan’s nuclear crisis drive up food and oil prices.

Asian economies from South Korea, Indonesia, Taiwan to China are all battling inflationary pressures, but some economists are concerned that India’s central bank may push too hard on the brakes.

The benchmark repurchase, or repo rate, at which the bank lends to commercial banks, is 6.75 percent while the reverse repo, paid to banks for deposits, is 5.75 percent.

“The bottom line is the central bank needs to act, but it should not go overboard,” CLSA economist Rajeev Malik said. “It must avoid a repeat of the mid-1990s outcome of killing inflation by crippling growth.”

The government has said it expects the economy to expand by 9 percent in the current fiscal year, returning to the level it reached before the global financial crisis.

However, there are already fears that Asia’s third-largest economy will undershoot the target because of interest rate increases.

Investment house Goldman Sachs has already slashed its growth forecast for the year to March next year from 8.7 percent to 7.8 percent. Credit Suisse economist Robert Prior-Wandesforde has trimmed his expansion forecast to 7.5 percent.

The economy is already showing signs of slowing with an 18 percent year-on-year drop in capital goods output in February, trimming industrial production growth to 3.6 percent.

Inflation, fed by food and fuel price rises, has been one of the biggest headaches for the -Congress-led government headed by Indian Prime Minister Manmohan Singh, whose coalition is also reeling from a string of corruption scandals.

Reducing prices is a political priority even as higher growth is seen as the key to reducing crushing poverty in the nation of 1.2 billion.

Poorer households, the backbone of the party’s support, have been especially hard hit by inflation, a traditional lightning rod for political discontent.

“Inflation is the most important short-term problem,” said Montek Singh Ahluwalia, deputy head of India’s influential economic Planning Commission, who has urged the central bank to use “all the flexibility” at its disposal.

Former central bank governor Y.V. Reddy said the RBI cannot afford any let up in its anti-inflation fight — even if it means slower growth.

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