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Reserve Bank to review hardening prices this month

Reserve Bank to review hardening prices this month
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First Published: Thu, Oct 18 2007. 11 43 PM IST

Policy matters: RBI governor Yaga Venugopal Reddy.
Policy matters: RBI governor Yaga Venugopal Reddy.
Updated: Thu, Oct 18 2007. 11 43 PM IST
Washington: Reserve Bank of India (RBI) governor Yaga Venugopal Reddy on Wednesday said consumer prices are “vulnerable” to shocks from oil and food costs that have contributed to a “hardening” in inflation figures.
“We have obviously some pressure in terms of growth in the monetary indicators,” Reddy said in a speech in Washington. “We will have to review” the data when RBI officials meet later this month.
India’s policymakers are struggling to cope with a record influx of overseas capital that may push up inflation. India’s economic growth—the fastest among major economies, after China—is also spurring an expansion in credit and money supply.
The country’s consumer price index (CPI) rose 7.3% in August from a year earlier, following a 6.5% rise the month before. At the wholesale level, weekly figures showed a moderation to the slowest pace of gains in two years last month.
“The CPI is slightly hardening,” Reddy said at the Peterson Institute for International Economics, a Washington-based research group.
Policy matters: RBI governor Yaga Venugopal Reddy.
Reddy declined to comment directly on the outlook for central bank policy. He also avoided judgement on the government’s proposed curbs on foreign purchases of the country’s stocks, which caused a sell-off in equities on Wednesday.
“There are some elements that do comfort,” Reddy said. “Excessive demand pressures have moderated” after the central bank’s monetary policy actions of the past two years, he said.
Policy action
RBI next meets to set monetary policy on 30 October. Officials this year have lifted the share of deposits that banks must hold with the central bank in an effort to slow loan growth and restrain inflation.
The steps helped bring down inflation to the lowest rate in two years last month.
Still, Standard & Poor’s (S&P) said the central bank’s goal of 5% inflation for the fiscal year is endangered by a surge in cash inflow. India’s stock market has attracted a net $17.7 billion (about Rs69,915 crore) foreign investment this year. “The Reserve Bank of India continues to grapple with a high level of excess liquidity in the system, record high international oil prices, and rising local commodity prices, all of which could threaten its inflation target,” S&P analysts wrote in their report.
Foreign inflows
The inflow of overseas funds has accelerated since the Federal Reserve lowered its interest rate last month, spurring global investors to chase higher returns elsewhere.
Overseas investors bought a net $8.2 billion Indian stocks since the Fed move, compared with $1.4 billion in the month before, according to data from the Securities and Exchange Board of India (Sebi).
Investors who buy shares anonymously, using derivatives known as participatory notes, will have 18 months to switch to investing directly in the market, the government said on Wednesday, citing a proposal from Sebi.
Govt must decide
It is up to the government to decide on capital controls, Reddy said. He noted that central bank officials have been “emphasizing the importance” of managing the capital account. More than half of the $17.7 billion of the net purchases of Indian stocks this year may have been through participatory notes, JPMorgan Chase & Co. analysts estimate.
The rules will be introduced on 25 October “with or without some modification”, finance minister P. Chidambaram told reporters in New Delhi.
India’s benchmark Sensitive Index fell almost 10% after the announcement before closing at 18,715.82, down 1.8%.
The rupee on Wednesday fell the most in two months, declining to 39.565 against the dollar. The currency has gained 12% so far this year, reaching a nine-and-a-half-year high this month. Reddy said the rupee’s exchange rate is “essentially” market-driven.
He also said India’s foreign exchange reserves are “comfortable”.
Asked if India should consider channelling some of its reserves into a government-controlled investment fund, he said capital flows, budget figures and net asset and liability data “warrant examination of this prospect some time a little in the future”.
India’s $906 billion economy, Asia’s third largest, has expanded at a record 8.6% average pace since 2003. The International Monetary Fund has forecast 8.4% growth forIndia in 2008, from 8.9% this year. The economy is at a “take-off” stage and is poised to grow as much as 10% a year for the next decade, Lehman Brothers Asia Ltd economists wrote in a report this week.
Cherian Thomas in New Delhi contributed to this story.
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First Published: Thu, Oct 18 2007. 11 43 PM IST
More Topics: RBI | Y V Reddy | Sebi | P Chidambaram | Inflation |