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Oct. 20 (Bloomberg) -- A top economic adviser to Indian Prime Minister Manmohan Singh signaled the need for higher interest rates before next week’s monetary policy decision as food inflation climbed to near a six-month high. Bonds fell.
“The fact that inflation is triggered by food inflation or supply side constraints doesn’t mean that the monetary policy doesn’t have a role to play,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters in New Delhi today.
India’s government and central bank have in recent days indicated the need to pursue a tight monetary policy to tame an inflation that has exceeded 9 percent since the start of December. By contrast, emerging markets from Brazil to Russia have cut borrowing costs to counter the risks posed by Europe’s sovereign-debt crisis and a faltering U.S. recovery.
“The RBI will be more focused on inflation than swayed by what other countries are doing,” said N.R. Bhanumurthy, a New Delhi-based economist at the National Institute of Public Finance. “India has a much worse inflation problem than other countries and the RBI will continue to tighten until inflation comes down significantly.”
He expects the Reserve Bank of India to increase its repurchase rate by a quarter of a percentage point to 8.5 percent in the Oct. 25 policy decision.
An index measuring wholesale prices of agricultural products gained 10.6 percent in the week ended Oct. 8, the commerce ministry said in a statement today. That’s the biggest increase since the week ended April 16.
India’s 10-year bonds fell after Rangarajan said inflation was higher than acceptable.
The yield on the 7.80 percent note due April 2021 rose to 8.82 percent at 3:05 p.m. in Mumbai from 8.76 percent before the comments were made. The BSE India Sensitive Index declined 1 percent and the rupee weakened 0.8 percent to 49.56 against the dollar.
India’s benchmark wholesale-price inflation was 9.72 percent in September, staying above 9 percent for a 10th month.
Reserve Bank Governor Duvvuri Subbarao has boosted the central bank’s benchmark rate by 350 basis points in 12 moves since mid-March 2010, the fastest round of increases since the central bank was established in 1935, Bloomberg data show.
The governor in July predicted inflation to ease to 7 percent by March 31. He forecast India’s economy will expand about 8 percent in the fiscal year through March from 8.5 percent in the previous year.
India’s inflation may be “under pressure” until December and the Reserve Bank “need not” follow the policy of reducing interest rates being pursued by some of its counterparts abroad, Finance Minister Pranab Mukherjee said yesterday.
Subbarao said Oct. 12 that inflation must ease before India’s central bank can start easing monetary policy.
Consumer demand in India is showing signs of waning as borrowing costs rise.
Sales at companies including Maruti Suzuki India Ltd., the nation’s biggest carmaker, fell 1.8 percent in September, the third straight monthly decline, the Society of Indian Automobile Manufacturers said Oct. 10.
India’s industrial production rose less than expected in August, according to the Central Statistical Office. Output at factories, utilities and mines increased 4.1 percent from a year earlier, slower than the 4.7 percent median of 20 estimates in a Bloomberg News survey.
“There is a concern that industrial production is sagging,” Rangarajan said. “When inflation remains at a level which is way above what is considered to be the acceptable threshold level of inflation, then the monetary authority has a major responsibility to contain inflation, and therefore that becomes the primary focus of the monetary policy.”
--With assistance from Kartik Goyal in New Delhi. Editors: Cherian Thomas, Arijit Ghosh
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