Bloomberg News

India’s Subbarao ‘Reasonably Confident’ of 7% Inflation Forecast

October 26, 2011

Oct. 26 (Bloomberg) -- Indian central bank Governor Duvvuri Subbarao said he’s “reasonably confident” of meeting a target of reducing inflation to 7 percent by the end of March, a level that still won’t be sufficient to justify interest-rate cuts.

“Inflation seems to be trending down,” he said in an interview with Bloomberg UTV in Mumbai today. Still, “we have to look at inflation carefully, look at a number of other indicators including the growth performance in deciding on when and how we should reverse the interest rate stance.”

An inflation rate of 7 percent isn’t within the central bank’s “comfort range,” Subbarao said. The threshold is between 4 percent and 6 percent, he said.

The Reserve Bank of India yesterday raised interest rates for a 13th time since the start of 2010 and signaled it’s nearing the end of its tightening. It raised the repurchase rate to 8.5 percent from 8.25 percent and said the likelihood of a rate action in December is “relatively low” as it expects inflation to slow by the end of the year.

“Given that we’ve done so much hiking already and given that we see inflation coming down December onwards, we thought that we must give greater certainty to potential investors,” Subbarao said. “The way of giving greater certainty as far as we are concerned is to give guidance about how we might calibrate the interest rate trajectory in the way forward so that they can make informed decisions.”

Optimistic View

On whether interest-rate reversals will happen in the next fiscal year, Subbarao said that “it will be difficult to look that far ahead but you know that we all have an optimistic view of the world and an optimistic view of India and I hope that it remains in the optimistic way and that the rate cycle can be brought down sooner rather than later.”

The rupee has weakened about 10 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 and threatening to boost import costs.

“Of course, an exchange rate movement affects our domestic situation but in the first place the driver has been the external situation,” Subbarao said. “When the externals have started settling, I hope there will be some reversal.”

“I don’t believe we’ve used exchange rate as an anti- inflationary tool in the past and we don’t intend to use it as an anti-inflationary tool,” he added.

--Editors: Stephanie Phang, John Chacko

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

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


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