New Delhi: India’s central bank has some room to ease policy to spur growth even as elevated consumer-price inflation complicates the situation, said Raghuram Rajan, chief economic adviser to the government of India.
“The Reserve Bank of India’s (RBI’s) position is a fairly difficult one,” Rajan said in an interview in Singapore on Wednesday. “Core inflation has come down. That would create some room as it has said in its past policy statements. Consumer-price inflation still continues to be high. The pace of monetary easing is something they will have to decide.”
Price pressures from India’s decision to allow higher diesel tariffs to curb subsidies and risks such as a record current-account gap will limit the central bank to a 25 basis- point interest-rate cut next week, according to 15 of 18 analysts in a Bloomberg News survey. Rajan spoke during the Asian leg of an international tour by finance minister P. Chidambaram to woo investors as the government strives to revive a struggling economy.
India’s consumer-price inflation accelerated to 10.56% in December, the second-highest level among the group of 20 major economies, according to data compiled by Bloomberg. Core inflation eased to 4.19% from 4.49% in November, according to calculations by Bloomberg.
Chidambaram, who presents the budget next month, pledged fiscal prudence during the tour and has contributed to an economic-policy overhaul since mid-September that snapped months of paralysis in the ruling coalition.
The steps taken include energy-subsidy curbs to contain a budget deficit, liberalization of foreign investment rules in some industries and the creation of a panel to speed up infrastructure projects.
“Where we can aid growth is through reforms,” Rajan said. “We play an enabling role. Ultimately the economy itself, the private sector and the public sector, will pay the dominant role in ensuring growth. But we can create the framework. We have done a fair amount and we will do more.”
The rupee has rebounded about 6% from a record low touched on 22 June, spurred by the policy changes. It remains down 7% in the past year.
The currency was 0.3% weaker at 53.8363 a dollar at 10.26am in Mumbai, while the Sensex fell 0.5%. The yield on the 8.15 per cent bonds maturing in June 2022 fell to 7.86% from 7.87% on Wednesday.
“The RBI cannot disregard the trajectory of consumer prices,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. “It will begin its rate cutting cycle, but it will be in a measured manner.”
The Reserve Bank has left its benchmark repurchase rate at 8% since a 50 basis-point cut in April 2012. Two analysts in the survey predicted a reduction to 7.5% on 29 January, and one no change.
Rajan, a former chief economist of the International Moentary Fund, was appointed the chief economic adviser in August last year.
The ministry predicts gross domestic product will rise 5.7% to 5.9% in the fiscal year through March 2013, the least in a decade. Rajan said, “there are early signs of a growth revival, though you can’t tell for sure.”
The government, facing a general election next year, is trying to avert a credit-rating downgrade after Standard and Poor’s and Fitch Ratings lowered their outlooks on Asia’s No. 3 economy in 2012. BLOOMBERG
Manish Modi and Tushar Dhara contributed to this story.