Mumbai: The Reserve Bank of India’s (RBI) “tightening bias” in its monetary policy to contain inflation will remain until factories increase capacity to meet growing consumer demand, Moody’s Investors Service, a credit ratings, research and risk analysis agency, said.
While overseas and local investments to ease capacity constraints continue, factory output won’t increase fast enough to curb inflation, Moody’s analyst Aninda Mitra said in an emailed statement.
RBI had on 31 July restricted funds available for lending with banks for the fourth time in a year, while keeping its key overnight borrowing rate at a five-year high on the view that inflation risks persist. The central bank also said this week that industries such as cement and textiles are facing capacity constraints.
“There is no doubt that capacity creation is the lasting answer to dealing with demand-led inflation,” said D.H. Pai Panandiker, president, RPG Foundation, an economic policy group in New Delhi. “Monetary measures can tackle inflation from capacity constraints in the short term.”
Incomes in India have grown at the fastest pace in Asia in the past two years, while investments by Microsoft Corp. and General Motors Corp. (GM) have added more jobs, boosting demand for services and goods.
“It’s not enough for policymakers to simply manage short-term demand without credibly addressing longer-term capacity problems,” Mitra said in the Moody’s statement. “A tightening bias in the monetary framework could remain until the government further reduces its debt, which precludes better resource usage in more productive areas.”
RBI may order commercial banks to set aside more deposits again by the end of the year, eight of 13 analysts said in a Bloomberg survey on 31 July after the central bank lifted its so-called cash reserve ratio by half-a-point to 7%.
The government has upwardly revised the final inflation data above RBI’s 5% ceiling for 13 straight weeks because of rising prices of manufactured products. The Centre revises its inflation data after a two-month lag.
The central bank expects the Union and and state governments’ debts to decline to 74.2% of gross domestic product (GDP) from 77% last year. That will help release more funds to increase capacity in power and coal, and boost factory production.
Capacity addition of electricity in the past five years was less than 57% of the target, taking the peak power deficit to an eight-year high in the fiscal year ended 31 March, according to the central bank.
National Aluminium Co. Ltd, India’s biggest alumina maker, on 27 July closed three units of its 960MW power plant because of coal shortage.
The reduction in debt will also help Prime Minister Manmohan Singh’s government generate the Rs18.1 trillion required by 2012 to improve the country’s roads, ports, railways and other infrastructure.
India plans to fund 60% of the estimated investment required in infrastructure from its own resources.
There is a budgeted allocation of a 40% increase in infrastructure spending to Rs1.34 trillion in the current fiscal year.
GM, Royal Dutch Shell Plc. and other companies have invested in more than 3,000 new factories and expansion projects worth more than Rs84,840 crore in India since May 2004 to cater to growing demand, according to the finance ministry.
Moody’s has a stable outlook on the country’s local currency debt, which it has rated Ba2 since June 1998—two levels below investment grade.