Inflation to fall, ease rates pressure: Montek

Inflation to fall, ease rates pressure: Montek

New Delhi: Headline inflation should ease faster than expected by the Reserve Bank of India (RBI), as past actions take effect, and this will reduce the pressure to further tighten monetary policy, a top government adviser said.

Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, said wholesale price inflation would fall to 6% by December compared with 10.55% in June. The central bank expects that level only by end March 2011.

The RBI has raised key interest rates four times by a total of 100 to 125 basis points (bps) since March. It has said that the balance of policy has shifted to contain inflation, in double digits for five straight months.

“If it turns out that, say, four weeks down the road it clearly looks like inflation is coming down, then the pressure to tighten further may be less," Ahluwalia, an influential aide to Prime Minister Manmohan Singh, told Reuters late on Tuesday.

Last week, RBI deputy governor Subir Gokarn said the central bank had done enough to tamp down inflation and now had a “handle on inflation."

That statement calmed markets that had feared further steep rate hikes to rein in inflation which is on target to hit 11% in July.

The central bank will next review policy on 16 September, but it is free to take action at any date if it so chooses.

Food inflation, which the government blames for these high levels of headline inflation, fell in late July on account of good monsoon rain, a fall in seasonal prices of fruits and vegetables, and the release of government food grains in the market.

But the central bank has highlighted rising demand-side pressures which could keep inflation at high levels.

Ahluwalia said in the interview that the central bank’s actions to tighten policy were to take care of these factors and expected them to show results in the coming months.

“The RBI is just being cautious, they’re giving themselves another three months (for 6% inflation). I’m sticking my neck out."

He also noted that normal monsoon rains would boost agricultural production and that government was on track to meet its target of bringing down the fiscal deficit.

“All of these things taken together suggest we will get out of this high inflation phase by the end of the calendar year."

No immediate diesel decontrol

The Congress party-led government has been attacked by the opposition parties who say it has not done enough to control prices. The rivals have criticized a June decision to remove controls on petrol prices and are resisting a similar move on diesel.

Ahluwalia said there would not be any immediate freeing up of diesel prices, a step required to narrow the fiscal deficit and to improve oil retailers’ profitability.

“It’s not something we expect in the next two months or three months or four months ... The most important thing for now is to have the petrol price increase understood, absorbed, and for people see it move up and down."

But Ahluwalia suggested a decline in crude oil prices could be used to push through the politically sensitive decision.

“If oil prices go down they should lower petrol prices and immediately link diesel at the existing prices, so that they can then move in tandem."

Ahluwalia said a proposed $11 billion infrastructure debt fund was unlikely to come up this year, as several regulatory changes were still required to set it up.

“We should have a decision by the end of the year on regulatory changes needed to facilitate that actually happen."

The fund is crucial for upgrading India’s creaky infrastructure to levels needed for double-digit economic growth and for developing the country’s fledgling bond market.

Proposals to open up India’s multi-brand retail sector to foreign investors too would not see progress soon, he said. India currently does not let firms like Wal-Mart run multi-brand stores in Asia’s third-largest economy.

“I am glad they (government) have put out a discussion paper as it clearly gives the signal that this issue remains on the agenda and we are trying to evoke response."