New Delhi: The real rate of inflation continues to be understated and the central bank should do more to stem short-term capital inflows that have pushed the rupee up and fuelled liquidity. This was Gerard Lyons, chief economist and gorup head of Global Research, Standard Chartered Bank, speaking at the World Economic Forum.
He pointed out that while India’s economic growth was impressive, it was “inevitable” that the numbers would become more volatile, particularly as the US economy slowed next year.
“The good is the economic outlook and the bad is the inflation prospect, and the ugly is the currency issue,” he said, adding, “Inflation is being suppressed, and it is likely to become a bigger issue in the next couple of years.”
The most watched measure of India, the wholesale price inflation is at its lowest in five years, just above 3% annually in November. However, analysts say the low reading masks the real picture.
“The two sources of inflation here in India are liquidity and fuel prices. Thankfully, as yet inflation expectations and also wages have not yet risen, but this is a growing problem,” said Lyons.
The government has put a ceiling on retail fuel prices and has been reluctant to raise them, even though global oil prices have neared $100 a barrel. The state-run oil firms are selling petrol and diesel below market price, which keeps inflation artificially low.
The central bank has repeatedly expressed its concern that higher oil prices are not passed through to domestic prices, which it says poses a risk to the economy. The central bank has lifted interest rates five times since mid-2006 and tried to absorb extra cash coming into India from foreign investors by raising banks’ reserve requirements.
The rupee, which has gained about 12% against the dollar this year and is one of Asia’s top-performing currencies, remains under upward pressure, and the central bank has been intervening to cap its gains and keep exports competitive.
Reacting on the complaints of some of the exporters, the government has announced relief measures like lower duties on textiles fibres, besides offering to share more of the interest burden on loans for some sectors.
Commenting on Lyons expectation that the rupee will appreciate further, B. Ramalinga Raju, founder and chairman of Satyam Computer Services, said, “The fact that the strengthening of the rupee has taken place over a very short period, it is more worrisome.”