New Delhi: India does not need to tighten monetary policy now and risk stalling a nascent economic recovery as inflation pressure was mainly caused by high food prices, the chief economic adviser to the finance ministry said on Monday.
Kaushik Basu also said Asia’s third-largest economy was likely to return to 9% growth in the fiscal year 2010-11, after topping 7.5% in the current year to end-March.
“Right now, there is no expectation of monetary tightening, and nor do I believe there is a reason for this,” he told reporters on the sidelines of a conference.
The comment helped pull bond yields off the day’s high, but traders remained cautious with the Reserve Bank of India (RBI) set to review policy on 29 January.
India’s food price inflation was at 19.83% in the 12 months to 19 December on supply shortages after the weakest monsoon in 37 years, followed by floods in parts of the country that hit crops.
The RBI has said it was worried about a spillover of higher food prices to other sectors, raising expectations of monetary tightening by the central bank to dampen inflationary expectations.
Last week, RBI deputy governor Shyamala Gopinath said the focus of monetary policy was shifting to managing recovery and containing inflation.
Most economists polled by Reuters last month expected the central 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.
Basu played down the concerns.
“You don’t want to have an effect across the board, which increases unemployment, which holds back the growth rate,” he said, adding inflation would “peter out” over a few months.
“Right now, it is a sector-specific intervention that is needed, which is in food sector and that is what the government is doing,” he said.
Food prices are politically sensitive in India, as hundreds of millions live on marginal incomes, and the price rises have sparked protests and walkouts in Parliament.
The government last week allowed open market sale of wheat at lower prices, and extended a deadline for sugar firms to meet their export obligations for importing sugar.
Basu said the economic rebound seen in the first half of the current year would continue in the December quarter, despite a poor farm output.
“The forecast is that it is going to be around 7.5%. I believe a little bit over that this year when the year closes,” he said.
“I expect by next year, certainly towards the end, the economy should be back again to the 9% growth path.”
India’s economy grew an annual 7.9% in the quarter through September, its fastest in 18 months, after expanding 6.1% in April-June.
The finance minister Pranab Mukherjee has said growth could reach around 8% in the current year after slowing to 6.7% in 2008-09 from 9% or more in the previous three years.
Basu said India’s high savings and investment rates would help sustain the recovery and an annual economic growth rate of 10% is possible within “a couple of years”.