India's central bank Governor Yaga Venugopal Reddy said policy makers will take steps to contain consumer demand and tame inflation, stoking speculation of an increase in interest rates.
“The Reserve Bank of India will play its part in moderating and managing aggregate demand so that pressures on prices are not intensified,'' Reddy told reporters in the western Indian city of Pune today. “We are in the midst of intensive examination of options.''
Inflation in Asia's third-biggest economy has raced to 11.05 percent, the fastest since May 1995, even as the central bank raised interest rates to a six-year high. Finance Secretary D. Subbarao said on June 21 that monetary policy is the “first line of defense'' against spiraling prices.
“We expect the central bank to go ahead with aggressive rate hikes,'' said Shuchita Mehta, senior economist at Standard Chartered Bank in Mumbai. “Inflation expectations need to be anchored swiftly.''
Mehta expects the central bank to increase its key repurchase rate by 100 basis points to 9 percent in the year to March 31 and raise the cash reserve ratio, or the proportion of money that lenders must set aside as reserves, by 75 basis points to 9 percent.
“The RBI will continue to take determined and calibrated measures as and when warranted, with a focus on managing expectations and on enabling adjustments in the economy in response to the oil shock,'' Reddy said.
Bond Losses
Indian bonds pared losses as investors bet the central bank's policy will help slow inflation. The yield on India's 10- year bonds slowed to 8.64 percent after Reddy's comments from the day's high of 8.76 percent.
“We are confident that with a well-managed smooth adjustment of this episode, the inflation would be brought in alignment with our aim as expressed in the policy from time to time,'' Reddy said.
Reddy, who wants to contain inflation to around 5.5 percent by March 31, said he is optimistic about food prices declining because of bumper crops.
“From October-November we should see some containment in food prices,'' Indranil Pan, chief economist at Kotak Mahindra Bank Ltd., said in a television interview in Mumbai faxless payday loans payday loans. “There can be comfort from food prices.''
Food grain production may rise to a record 227.3 million tons in the year ending June helped by bumper rice, wheat and lentils output, the agriculture ministry said in April. It may receive a further boost as rains in the four-month monsoon season that started last month are forecast to be adequate.
`Global Problem'
“Oil price increase is now a global problem, making inflation a problem for all countries,'' Reddy said. “Hence, our solutions to the problem will also be similar, but tailored to suit our conditions.''
Reddy has raised the repurchase rate eight times in the past 2 1/2 years and increased the cash reserve ratio seven times since December 2006 to slow money supply and cool inflation. He last raised the repurchase rate on June 11 and the cash reserve ratio on April 29.
China told lenders to set aside more money for a fifth time this year on June 7 to cool inflation that is close to a 12-year high. Banks must put aside a record 17.5 percent of deposits as reserves from June 25.
Faster Pace
Singapore's central bank has allowed its currency to strengthen at a faster pace against the U.S. dollar this year, saying the exchange rate remains its most effective tool to fight inflation.
Reddy said rising borrowing costs won't hurt India's record growth momentum. India's economy, which has grown an average 8.9 percent in the past four years, may grow as much as 8.5 percent in the year ending March 31.
“We on the basis of current information, don't come to a conclusion that managing this problem will necessarily involve sacrificing growth,'' Reddy said. “As of now, we don't see any reason to jump to a conclusion that growth will be adversely affected.''
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