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Inflation may have hit plateau: Pranab

Inflation may have hit plateau: Pranab
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First Published: Sun, Oct 24 2010. 03 22 PM IST
Updated: Sun, Oct 24 2010. 03 22 PM IST
Gyeongju (South Korea): Headline inflation in India, which was at 8.62% in September, may have reached a plateau, finance minister Pranab Mukherjee said.
High food prices, which have helped keep broader inflation in India well above the central bank’s comfort zone of around 5 to 6%, are the result of both supply and demand factors that reflect changing consumption patterns, Pranab told Reuters.
The Reserve Bank of India, (RBI) which expects headline WPI (wholesale price index) inflation to ease to 6% by the end of March, has raised policy rates five times this year to rein in inflation and is widely expected to raise rates by a further 25 basis points (bps) on 2 November.
“The direction of the inflation rate movement is consistent with the RBI’s projection made in the July review, though the magnitude could be slightly different. Inflation rates seem to have reached a plateau,” Pranab said in a written response to questions from Reuters emailed late on Saturday.
The WPI inflation was in double-digits for six months through July.
Pranab said food inflation, which has been stubbornly high and came in at more than 15% in early October on an annualized basis, is both a demand and supply issue.
“High food inflation reflects both demand and supply factors. Demand factors ... reflect changing consumption patterns,” said Pranab, who was in South Korea for the Group of 20 meeting of finance ministers.
Rising incomes fuelled by an economy on track to grow at 8.5% this fiscal year have led Indians to consume more food.
IMF Reforms
Pranab welcomed a G-20 deal on International Monetary Fund (IMF) reforms that underlines the growing clout of developing economies by giving them a bigger voice.
“Our complaint was that the quota share should reflect ground reality and economic strengths currently. Otherwise it would have eroded the credibility of the institution. That has now been corrected,” he said.
The finance minister also said further quantitative easing by advanced economies would cause problems, and Indian policymakers will respond depending on the extent of the easing.
Emerging economies including India are seeing an influx of fund flows from the developing world as investors seek higher returns, pushing up asset prices and putting upward pressure on currencies including the rupee.
The US Federal Reserve is expected to embark on another round of asset purchases, which would inject more liquidity into markets.
Pranab reiterated the central bank’s stated position that India will intervene only if capital flows are “lumpy” and “volatile”.
Global regulators are still working on a framework for identifying systemically important financial institutions but Pranab said Indian banks may be be asked to maintain additional capital and liquidity levels once proposals are finalized at the G-20 level.
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First Published: Sun, Oct 24 2010. 03 22 PM IST
More Topics: Inflation | RBI | Gyeongju | G-20 Meet | WPI |