Rate talk swirls ahead of RBI governor and finmin meeting

Rate talk swirls ahead of RBI governor and finmin meeting


* Central bank governor, finance minister to meet 1045 GMT

* Speculation of policy action to contain inflation pressure (Adds detail)

By Rajkumar Ray

New Delhi: Reserve Bank of India governor Duvvuri Subbarao will meet finance minister Pranab Mukherjee on Friday evening, sources said, amid speculation the bank would tighten monetary policy to help stem rising prices.

The meeting is due to start at 4:15 p.m. (1045 GMT) and while it is not unusual for the two officials to discuss the economy, analysts said the meeting could be a prelude to an earlier-than-expected interest rate rise.

The yield on the 10-year benchmark bond rose to 7.70%, matching a 13 -month high hit on 11 December. It had ended at 7.64% on Thursday.

“Inflation could be on the agenda," said a government official, who asked to remain anonymous. Data released on Thursday showed that food prices surged an annual 20% in early December, reinforcing market views a tightening was coming.

The central bank’s next scheduled policy review is at the end of January, but it can change policy settings at any time. Of the six cuts in the repo rate between Oct 2008 and April, only the last came at a scheduled review.

Setting the Stage

“Headline inflation numbers have indeed caused an agitation in political circles as well, and it is not surprising that monetary authorities and the finance ministry would meet to discuss the issue on a more urgent basis," said Atsi Sheth, chief economist at Macro-Sutra in Mumbai.

“I think the stage is slowly being set for a tightening in the next few weeks rather than at the end of January."

In a report to parliament on Friday, the finance ministry said pressure on food prices was likely to continue, and food imports could help stem price rises. It also said a surge in capital inflows could lead to an inflationary spiral.

“Government is monitoring price situation on regular basis and containment of inflation is high on its agenda," Mukherjee said in a written reply to a lawmaker’s question.

Food prices are soaring because of shortages after crops were hit by the weakest monsoon rains in 37 years, followed by flooding in parts of the country. The price rises come as the economy is picking up strength after a dip in late 2008 and early 2009.

Markets had expected that the central bank would first raise the cash reserve ratio for banks, or CRR, to drain excess funds from the market, with rate rises to follow.

Subbarao has said that monetary policy is not the right tool to fix supply problems such as food shortages, but has also noted the risk that if soaring food prices were factored into expectations for other prices it would create inflation pressures throughout the economy.

“We are all aware that currently inflation is a supply-side situation, but we are also seeing inflationary expectations go up," said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai. “So rates have to go up, but the question is by how much."

The RBI cut its main lending rate, the repo rate, by 425 basis points between October 2008 and April, slashed the CRR and pumped cash into markets to shore them and the economy up against the global financial crisis and slowdown.