New Delhi: The finance ministry will likely not oppose another quarter point rate hike on Tuesday to temper inflationary expectations stemming mainly from high food prices, sources at the ministry told Reuters.
The finance ministry, which is against aggressive monetary tightening, says that if the Reserve Bank of India (RBI) does hike rates by 25 basis points on Tuesday, it will not choke off economic growth while managing capital inflows will still not be a problem.
RBI governor Duvvuri Subbarao met finance minister Pranab Mukherjee on Friday as part of a customary pre-monetary policy meeting ahead of the bank’s monetary policy review on 2 November.
“A 25 basis points hike at this juncture may not have any material impact on growth,” a senior finance ministry official said. Another senior finance ministry official agreed.
While the RBI has the ultimate call, the ministry’s views on monetary policy are seriously considered before any rate move.
A Reuters poll on Thursday showed the RBI will likely raise its key rates by at least 25 basis points at its quarterly policy review on 2 November.
The RBI is battling stubbornly high headline inflation, which inched up to 8.62% in September on higher food prices, and aims to bring it down to 6% by March.
Food inflation, until recently a supply side problem, is beginning to become more entrenched and spilling into the broader economy, complicating monetary policy.
The agriculture ministry expects a 10% rise in summer grains output and a 17% increase in cane output that are likely to ease supply side pressures on food prices.
Despite these estimates and normal rains this year, food inflation is still stubbornly perched at an annual 13.75% in mid-October from 15.53% a week ago. It has remained in double digits for around three months now.
Subir Gokarn, a RBI deputy governor called on Tuesday high food prices a “structural problem” and warned rising prices would put upward pressure on inflation and rates.
The RBI has raised repo and reverse repo rates five times this year by 125 and 175 basis points respectively.
Inflows triggered by hike can be managed
The ministry may also not oppose a 25 basis points rise as officials say inflows are unlikely to turn excessive and create an asset bubble.
Foreign investors so far have pumped in about $25 billion in 2010 in India’s equity markets, while their investment in debt till date stands at $9.9 billion.
“Inflows would be higher this year. But they would not be any where near 2007 levels,” one official said, adding the country’s higher current account deficit will help absorb those inflows.
India’s current account deficit was nearly 3% of GDP at a record $13.7 billion in June.
Finance ministry officials say governor Subbarao should avoid his predecessor Y V Reddy’s policy of aggressive monetary tightening that slowed down the economy and should pause after the next rate move to watch the impact of its monetary action.
A slew of macro-economic data, suggesting a moderation in growth, are also swinging the mood at the ministry against any aggressive monetary tightening.
Non-food manufacturing inflation that the RBI monitors for gauging demand-push inflation has stayed at around 5 percent for the past two months, a level officials thinks is comfortable.
Industrial output growth in August eased to 5.6% from 15.2% in July, while the annual growth in infrastructure output slowed down to 2.5% in September from 3.9% a month ago. Both manufacturing and services PMIs are pointing to a slower GDP growth in coming quarters.
“Monetary policy should be ahead of the curve. You should not be tightening, when you should be loosening. And should not be loosening, when you should be tightening. You should know when to pause,” one of the finance ministry officials said.