BackRaghuram Rajan seen switching to consumer price inflation at RBI
Rajan looks set to use consumer price inflation as the main guide for monetary policy for the first time
Premium(A panel Raghuram Rajan had set up after becoming governor on 4 September is due to report by December on revising the monetary-policy framework. )
New Delhi: Reserve Bank of India (RBI) governor Raghuram Rajan is set to use consumer-price inflation as the main guide for monetary policy for the first time, a shift that signals further increases in the benchmark interest rate.
Rajan, 50, will add to last week’s surprise repurchase-rate boost after specifying a pace of consumer-price gains as the key target, seven of 10 analysts said in a Bloomberg News survey. A panel he set up after becoming governor on 4 September is due to report by December on revising the monetary-policy framework.
Rajan, a former International Monetary Fund (IMF) chief economist, is reviewing the array of goals now guiding policy after growth slowed to a decade low and as consumer inflation exceeds 9%. Focusing on consumer prices would simplify those objectives and curb a practice of relying on wholesale inflation, bringing the RBI’s approach closer to counterparts from Indonesia to Europe.
“The bank seems to be moving towards a de facto inflation-targeting regime and that’s going to be a big change in its policy framework," said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd in Mumbai. “It would represent a more consistent policy to fight price pressures."
India’s consumer price index (CPI) rose 9.52% in August from a year earlier, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg. Stripping out food and fuel, core consumer prices climbed about 8.2%, according to calculations by Bloomberg based on government data.
Interest rates
“Core inflation remains high," Rajan told reporters on Thursday during a visit to Frankfurt, Germany. “Domestic inflation is a better policy anchor than the exchange rate for emerging-market central banks," he said.
Two survey respondents said he’ll target the core gauge. Another said either the core or main measure will be used.
The jump in living costs has eroded consumer demand and hurt the poor in a nation where about 826 million people live on less than $2 per day, according to World Bank data.
Inflation has been stoked by bottlenecks in the supply of goods amid choked roads and ports, surging food prices, higher fuel costs and more expensive imports. The rupee has slumped 14.6% versus the dollar in the past year, according to data compiled by Bloomberg.
The currency strengthened 0.6% to 62.0788 per dollar at the close in Mumbai on Thursday. The BSE Sensex gained 0.2%. The yield on the 10-year bond due May 2023 declined to 8.72% from 8.79% a day earlier.
‘Inflation hawk’
Rajan, vowing to fight price pressures, raised the repo rate by a quarter point to 7.5% in his first review on 20 September. He also eased some liquidity curbs in the banking system imposed by predecessor D. Subbarao to support the rupee.
“Rajan lived up to his reputation of inflation hawk," said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. Low and stable inflation expectations are a cornerstone for sustainable growth.
Three analysts in the survey said he’ll raise the benchmark rate another 50 basis points by the end of March, while two predicted the same magnitude by the end of 2013. One expected 7.75% by year-end, and another 8.25% by end-2014. Two analysts saw no change, and one other was unsure.
RBI currently uses wholesale-price inflation as the main cost-of-living measure to guide policy. The index, which rose 6.1% in August, is more than six decades old. The consumer gauge was created in 2011.
Rajan inherited a sliding rupee, elevated price increases, subdued investment and risks from current-account and budget deficits when he became the 23rd governor.
Fiscal deficit
Economic expansion will slow to 4% this fiscal year from a decade-low 5% in the 12 months ended March, according to HSBC Holdings Plc.
Elsewhere in Asia, Japan’s inflation accelerated to the fastest pace since 2008 in August on higher energy costs, a report showed on Friday. In Europe, France is due to release gross domestic product (GDP) data. US consumer spending probably rose in August for a fourth consecutive month, a Bloomberg survey showed ahead of figures due today.
“Rajan may hold off from further repo-rate increases for now as higher borrowing costs would threaten to deepen the slowdown in Asia’s third-largest economy," said Sujan Hajra, an economist at Anand Rathi Financial Services Ltd in Mumbai.
Prime Minister Manmohan Singh’s government has pledged to restrain the fiscal shortfall to lower price pressures, part of wider changes to economic policy in the past year to improve the nation’s outlook ahead of elections due by May.
“The success of that effort lies beyond Rajan’s control as subsidies stoke government spending, which poses a risk to the inflation fight," said Ashutosh Datar, an economist at brokerage India Infoline Ltd in Mumbai.
“The central bank is moving in the right direction," said Arun Singh, an economist at Dun and Bradstreet Information Services India Pvt. Ltd in Mumbai. “Now it’s the government’s turn to act responsibly on the fiscal side and step up efforts to ease bottlenecks to address the drivers of inflation."
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