Mumbai: India’s monetary policy focus is shifting to managing recovery and containing inflation from fostering growth after the global downturn, Reserve Bank India (RBI) deputy governor Shyamala Gopinath said.
She said rising food prices were fuelling concerns that they might lead to broader price pressures and the policy challenge was to address constraints on the supply side.
Her comments, which reinforced market expectations of monetary tightening in January, helped push the 10-year benchmark bond yield up five basis points on Tuesday to 7.69%.
“The near-term policy challenges are clearly conditioned by the evolving growth-inflation outcome that supports shifting the balance of policy focus on managing the recovery and on containment of inflation,” Gopinath said in a speech delivered in Bangalore on Monday and released by the central bank on Tuesday.
“Since supply shocks take time to taper off, there is a risk that high inflation in essential commodities could affect inflation expectations over time and give rise to generalized inflation,” she said.
Changing tack: RBI deputy governor Shyamala Gopinath says the focus will now shift to managing the recovery of the Indian economy. Ramesh Pathania / Mint
She said effective assessment of inflation and using monetary policy actions at the right time would be critical.
Food prices rose 18.65% in mid-December from a year earlier, data showed last week.
Broader annual wholesale price inflation was 4.8% in November and some economists expect it to reach about 8% by the end of the fiscal year in March, well above the central bank’s perceived comfort level of about 5%.
Investors are factoring in chances of a rise in interest rates in January or soon thereafter. India and South Korea are expected to be among the first Group of Twenty nations to follow Australia and raise rates.
RBI’s next scheduled policy review is on 29 January, but the central bank can change policy at any time.
“Surely, they will tighten policy, but the question is whether they will do it before the January policy meeting or at the meeting,” said Piyush Wadhwa, senior vice-president at ICICI Securities Primary Dealership Ltd.
Gopinath’s comments follow those from fellow deputy governor Subir Gokarn on Thursday, who said the January review would focus both on growth and inflation, instead of the previous policy focus on growth.
Most economists expect the apex bank to start tightening policy by raising banks’ cash reserve ratio, or the proportion of deposits that banks must set aside as cash, by the end of January.
“From here on, as we see more stronger and sustained signals of recovery, RBI will accordingly tighten (policy),” said Gunjan Gulati, an economist at JPMorgan Chase.
Gopinath said there were expectations of a rise in capital flows into India, but did not say whether or how the authorities might respond.
“There is a perception that India may experience surges in capital inflows again, because of easy global liquidity conditions and superior growth prospects of India in the global economy,” she said.
Capital inflows of about $17 billion (Rs79,390 crore) into Indian stocks have helped them surge more than 80% this year, prompting speculation that India might join economies such as Brazil and Taiwan that have taken steps to curb inflows.
On Thursday, however, Gokarn said inflows were healthy and other officials have also played down concerns about capital inflows.