Reserve Bank of India (RBI) governor Yaga Venugopal Reddy said the country’s policymakers will take steps to contain consumer demand and tame inflation, stoking speculation of an increase in interest rates.
“The Reserve Bank of India will play its part in moderating and managing aggregate demand so that pressures on prices are not intensified,” Reddy told reporters in Pune. “We are in the midst of intensive examination of options.”
Inflation in Asia’s third biggest economy has raced to 11.05%, the fastest since May 1995, even as the central bank raised interest rates to a six-year high.
Finance secretary D. Subbarao said on 21 June that monetary policy is the “first line of defence” against spiralling prices.
“We expect the central bank to go ahead with aggressive rate hikes,” said Shuchita Mehta, senior economist at Standard Chartered Bank in Mumbai. “Inflation expectations need to be anchored swiftly.” Mehta expects the central bank to increase its key interest rate by 100 basis points to 9% in the year to 31 March and raise the cash reserve ratio, or the proportion of money that lenders must set aside as reserves, by 75 basis points to 9%.
A basis point is one-hundredth of a percentage point.
“RBI will continue to take determined and calibrated measures as and when warranted, with a focus on managing expectations and on enabling adjustments in the economy in response to the oil shock,” Reddy said.
Indian bonds pared losses as investors bet the central bank’s policy will help slow inflation. The yield on India’s 10-year bonds slowed to 8.64% after Reddy’s comments from the day’s high of 8.76%. “We are confident that with a well-managed smooth adjustment of this episode, the inflation would be brought in alignment with our aim as expressed in the policy from time to time,” Reddy said.
Reddy, who wants to contain inflation to around 5.5% by 31 March, said he is optimistic about food prices declining because of bumper crops. “From October-November, we should see some containment in food prices,” Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, said in a television interview. “There can be comfort from food prices.”
Foodgrain production may rise to a record 227.3 million tonnes in the year ending June helped by bumper rice, wheat and lentils (or pulses) output, the agriculture ministry had said in April. It may receive a further boost as rains in the four-month monsoon season that started last month are forecast to be adequate.
“Oil price increase is now a global problem, making inflation a problem for all countries,” Reddy said. “Hence, our solutions to the problem will also be similar, but tailored to suit our conditions.” Reddy has raised the bank’s key interest rate eight times in the past two-and-a-half years and increased the cash reserve ratio seven times since December 2006 to slow money supply and cool inflation. He last raised the rate on 11 June and the cash reserve ratio on 29 April.
Reddy said rising borrowing costs won’t hurt India’s record growth momentum. India’s economy, which has grown an average 8.9% in the past four years, may grow as much as 8.5% in the year ending 31 March.
“We on the basis of current information, don’t come to a conclusion that managing this problem will necessarily involve sacrificing growth,” Reddy said.
“As of now, we don’t see any reason to jump to a conclusion that growth will be adversely affected.”
Ambika Behal and Nina de Roy in London contributed to this story.