Rate hike an ‘obvious solution’ to inflation, says finance secretary

Rate hike an ‘obvious solution’ to inflation, says finance secretary
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First Published: Mon, Jul 28 2008. 11 45 PM IST
Updated: Mon, Jul 28 2008. 11 45 PM IST
New Delhi/ Hong Kong: India’s inflation may accelerate from a 13-year high and a further increase in interest rate is an “obvious solution,” finance secretary Duvvuri Subbarao said.
“I can’t say firmly that it has peaked because inflation will depend on a number of factors including global factors which are beyond our control,” Subbarao told Bloomberg News in a television interview on Monday from Tokyo.
“That looks like an obvious solution,” he added when asked if the central bank may raise interest rates further to contain price pressures.
The Reserve Bank of India may on Tuesday raise borrowing costs for the third time in less than two months, according to 16 of 22 economists in a Bloomberg News survey. Higher food and energy prices have been eroding support for Prime Minister Manmohan Singh, whose government faces an election before May.
To contain inflation, the central bank raised its benchmark interest rate twice in June, lifting it to a more than six-year high of 8.5%. It also increased the cash reserve ratio in a phased manner to 8.75%.
Soaring energy and commodity prices have stoked inflation in India. Crude prices touched an all-time high of $147.27 (Rs6,230) a barrel on 11 July, increasing concern import costs will surge for a country that relies on overseas oil to meet three-quarters of its needs. Crude oil prices have since then softened to around $124 a barrel.
“There is obviously a case for raising fuel prices because there is a relentless increase in fuel prices,” Subbarao said. “How much we can transmit oil prices will depend on how we need to take care of our poor people.”
Inflation stood at 11.89% in the week ended 12 July, weakening for the first time in almost two months from its previous level of 11.91%. “I do hope that we are seeing the stabilization phase of inflation and hopefully in the next few months it will start coming down,” Subbarao said.
Subbarao said India’s exchange rate is at this stage not an effective tool to contain inflation. “I don’t believe that appreciation at the current juncture is a very effective measure for inflation management.”
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First Published: Mon, Jul 28 2008. 11 45 PM IST