Indian interest rates are likely to remain elevated as long as surging inflation imperils economic growth, a Reserve Bank of India (RBI) deputy governor said.
“If you are having continuously high inflation, it will kill your growth,” RBI deputy governor K.C. Chakrabarty said on Thursday. “If interest rates are high, that’s because inflation is high, and unless inflation is brought down, interest rates will not come down.”
RBI Governor Raghuram Rajan faces the challenge of quelling consumer inflation of more than 11 percent, the highest in the G20 major economies, as bottlenecks in the supply of everything from food to energy stoke price increases.
Since taking over the RBI in September last year, he has raised the benchmark repurchase rate 50 basis points even as expansion falters.
“We have to improve the productivity, efficiency, distribution system, and, at the same time, keep our monetary policy such that demand factors should not play a role,” Chakrabarty, 61, said in the interview in Mumbai.
Rajan surprised economists last month by holding the benchmark repurchase rate at 7.75 percent instead of adding to the increases of 25 basis points in both September and October last year.
Consumer prices climbed 11.24 percent in November last year.
Wholesale inflation was 7.52 percent, a 14-month high, as onion prices tripled from a year earlier.
A weaker rupee is among the causes of Indian inflation, with the currency down about 12.5 percent against the US dollar in the past year.
The yield on the 10-year government bond has climbed to 8.84 percent from about 8 percent in the same period.
“The depositor has to be given a higher return than inflation, otherwise he will not save money,” said Chakrabarty, who has been an RBI deputy governor since 2009.
Inidan Prime Minister Manmohan Singh’s government has struggled to stem a decline in India’s savings and investment ratios.
Savings as a proportion of GDP fell to 30.6 percent last year from 36.8 percent in 2007, according to IMF estimates.
Investment dipped to 35 percent from 38.1 percent.
Chakrabarty said the RBI is concerned about non-performing assets in the banking industry.
At the same time, he added that “if you say the system is going to collapse because of this NPA, the answer is no.”
The risk to India’s banking industry rose in the six months through September last year as bad loans surged and profitability slumped, the central bank said in a report on Monday.
The average gross bad-loan ratio may reach 4.6 percent of total lending by September from 4.2 percent as of Sept. 30, it said.
The US$1.8 trillion economy is likely to expand 5 percent in the 12 months through March 31, the same pace as the past fiscal year, which was the weakest in a decade, according to central bank estimates.