New Delhi: India will maintain a “fairly tight” monetary policy to curb inflation that may be stoked by rising crude oil prices and consumer demand, finance minister Palaniappan Chidambaram said.
“We have to do our best to keep inflation down in a world where fuel prices are flaring up, commodity prices are increasing and demand remains high in China and India,” Chidambaram, 61, said.
Bond investors in India have been expecting interest rates, which have risen since October 2004, to ease after inflation fell to near a 13-month low and record growth in bank loans slowed.
The yield on benchmark 10-year bonds declined 42 basis points in the past month, partly on optimism that the central bank this month may refrain from raising borrowing costs further.
“I would expect the Reserve Bank of India (RBI) to maintain the status quo,” said D.H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi.
“The central bank has a difficult task to keep inflation within acceptable limits and at the same time not allow the rupee to appreciate too much and hurt exports,” he added.
Chidambaram wants to drive down inflation to as low as 4%. The benchmark wholesale price inflation rate fell by one third to 4.27% in the week ended 30 June from a two-year high in January. The Congress party’s loss of power this year in Punjab and Uttarakhand and its poor performance in the politically crucial Uttar Pradesh has been attributed mainly to rising prices.
“I am still concerned about commodity prices, prices of foodgrains, edible oils and most importantly, I am very concerned about crude oil prices,” said Chidambaram, who holds a Harvard MBA and is a lawyer by training.
“Inflation is low because we kept a tight control over money supply and we have allowed the rupee to appreciate a bit,” he added.
RBI, which will release its next monetary policy statement on 31 July, increased its key overnight lending rate six times in the past one-and-a- half years and also raised its cash reserve ratio, or the proportion of deposits commercial banks need to maintain with the central bank, three times since December.
That helped slow the growth in loans to consumers and companies to 23.4% in the year to 29 June compared with a 31.8% gain in the same period last year, the central bank had said on 13 July.
Still, India has expanded at a record 8.6% pace since 2003, making it the world’s second-fastest growing major economy and increasing the consumption of oil. The country currently imports almost three-quarters of its oil needs.
Crude oil approached an 11-month high in New York on Wednesday, after an energy department report showed that US petrol inventories unexpectedly fell last week. Oil is up 23% this year.
“Rising crude oil does not necessarily mean higher local fuel prices,” said Chidambaram. “It means our subsidy bill can go up” as the government prevents higher oil prices from filtering into the economy, he added.
Indian Oil Corp. Ltd, the nation’s largest refiner, and its state-run counterparts are barred by the government from raising fuel prices in line with crude oil costs to control inflation.
India plans to spend Rs2,840 crore on compensating the refiners for subsidizing fuel in the year that started 1 April compared with Rs2,785 crore a year ago, according to budget estimates made in February.
The country’s other inflation-fighting measures are also adding to its subsidy bill, which makes up about one tenth of the Union budget.
The gain in the rupee to a nine-year high has helped reduce imports of oil and other products, and contain inflation, but “it does pose some other problems”, the finance minister said on Wednesday.
“Exporters are complaining,” Chidambaram said. “We have given some incentives to our exporters.”
The government this week eased interest rates and increased the tax refund limit for small and medium-sized exporters to cushion them from a 9.5% gain in the currency this year. The relief to textile, leather, handicraft and other exporters will cost the Union government Rs1,300 crore, the finance ministry had said on 12 July.
The currency had surged as the central bank slowed dollar purchases on concerns that rupee funds injected from the exercise will stoke inflation.
Kartik Goyal contributed to this story.