Bloomberg News

India’s Central Bank Says Weaker Rupee Adds to Price Pressure

October 24, 2011

Oct. 25 (Bloomberg) -- India’s central bank said the rupee’s weakness has emerged as a “new source” of price pressure and that the challenge to tame inflation “remains significant,” signaling the need for higher interest rates.

“The baseline inflation path still remains sticky and broadly unchanged from earlier projections,” the Reserve Bank of India said in a report yesterday before its policy meeting in Mumbai today. “This has made policy choices more complex. Some sacrifice of growth is inevitable in the current milieu of high inflation.”

Inflation in India has exceeded 9 percent since the start of December even after the central bank raised rates by a record from mid-March 2010. India’s monetary stance contrasts with emerging nations from Brazil to Russia, which have cut borrowing costs to shield their economies from Europe’s debt crisis and a faltering U.S. recovery.

“Inflationary pressures in India are acute,” said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc. “Though there are risks to growth, the RBI will prefer to tighten rates in its fight against price gains.”

Sahay is among the 18 of 28 economists in a Bloomberg News survey who expect the Reserve Bank to boost its repurchase rate by a quarter of a percentage point to 8.5 percent today. The rest expect no change. India’s central bank is scheduled to announce its decision at 11 a.m.

Bond Yields

Benchmark 10-year government bonds were little changed at the close of trading in Mumbai yesterday. The yield on the 7.80 percent note due April 2021 held at 8.82 percent, a three-year high. The BSE India Sensitive Index gained 0.9 percent and the rupee strengthened 0.4 percent to 49.83 against the dollar.

India’s main inflation gauge measured by wholesale prices was 9.72 percent in September. By comparison, consumer prices rose 7.3 percent in Brazil, 6.1 percent in China and 7.2 percent in Russia among the BRIC nations.

The depreciation of the rupee has emerged as a “new source of price pressures,” the report said. India’s imports account for 22 percent of the economy and a decline in the rupee increases the risk of imported inflation, according to the report.

India’s rupee has weakened 10.3 percent against the dollar this year as investors sold stocks in emerging markets because of risks to global growth, making the currency the worst performer in Asia.

Inflation Risks

Even so, the central bank said that the rupee’s drop is in line with other emerging-market currencies and “with falling global commodity prices partly offset by rupee depreciation, the risks to inflation projections are now balanced.”

Inflation is a political issue in India as it erodes spending power in a nation where the World Bank estimates more than 75 percent of the population lives on less than $2 a day.

Reserve Bank Governor Duvvuri Subbarao said Oct. 12 that inflation must cool before India’s central bank can start easing monetary policy.

The governor in July predicted inflation to slow 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.

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.

Consumer Demand

That’s curbing consumer demand. 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.

India’s economy may expand 7.6 percent in the fiscal year through March 31, according to the median of forecasts from agencies including the International Monetary Fund and the Asian Development Bank, compiled by the central bank, yesterday’s report showed. The survey in July projected growth of 7.9 percent.

Inflation may average 8.8 percent in the financial year, the survey said, compared with its previous estimate of 8.6 percent.

“The challenge at this juncture is to contain inflationary pressures, while factoring in the lags in monetary transmission, which are long and variable and therefore difficult to assess,” the central bank said.

--With assistance from Manish Modi in New Delhi. Editors: Cherian Thomas, Abhay Singh

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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