Inflation spreading, RBI may raise rates: Pronab Sen

Inflation spreading, RBI may raise rates: Pronab Sen

New Delhi: Inflation in India is spreading and the central bank could raise interest rates before its scheduled policy review late next month to tame high prices, a top government official said on Wednesday.

The government’s chief statistician Pronab Sen said core inflation “is now starting to get worrying," with price pressures becoming more pervasive.

“We are seeing it (inflation) happen in non-agricultural products. That is one area of worry that has to be tackled," he told reporters.

When asked whether the Reserve Bank of India (RBI) could opt for a rate hike before its 27 July review, Sen said the central bank could raise rates “any time."

Speculation that the central bank would raise policy rates before its July review have been mounting after headline inflation rose to a higher-than-expected 10.16% in May, the highest rate in the G-20 group of leading economies.

Markets are divided over whether the central bank will move ahead of the review although most analysts surveyed by Reuters expect the RBI to wait until 27 July due to liquidity concerns.

The RBI has raised policy rates twice this year by a total of 50 basis points in March and April. Analysts in the Reuters poll expect the central bank to raise them by another 50 basis points by the end of the year.

The repo rate, at which it lends to banks, now stands at 5.25% and reverse repo rate, at which it absorbs excess cash from the banking system, is at 3.75%.

June inflation seen below 10%

Sen, who is scheduled to soon join the government’s influencial planning body as an adviser, said headline inflation could dip below 10% in June because of a weakening base effect.

Markets showed little reaction to his remarks on Wednesday.

“There was no reaction, the market is probably getting used to too much of statements these days," said a trader in Mumbai.

Finance minister Pranab Mukherjee told Reuters Television in Washington on Tuesday he was concerned about double digit inflation but believes it can be tamed by a strong harvest and increased output of key food items..

Policymakers have consistently missed their own predictions on headline inflation. The central bank had predicted 8.5% inflation for March, which then turned out to be more than 11%.

High prices have emerged as a policy headache for Prime Minister Manmohan Singh’s government in a country with hundreds of millions of poor, and may have dampened a drive for economic reforms such as hiking retail fuel prices.

Mukherjee told Reuters Television the central bank was prepared to act to control inflation “as and when considered necessary."

He added that headline inflation can fall to a rate of about 4.5% to 5% by the end of the current fiscal year in March 2011 on increased food supplies such as sugar and oilseeds after monsoon rains.