July 29 (Bloomberg) -- India’s central bank may start reversing its interest-rate cuts in early 2010 as food and energy prices fan inflation, after it kept borrowing costs unchanged yesterday to bolster economic growth.
“On the way forward, the Reserve Bank will have to reverse the expansionary measures to subdue inflationary pressures while preserving the growth momentum,” Governor Duvvuri Subbarao said. Inflation may “creep up” to about 5 percent by March next year compared with an April estimate of 4 percent, he said.
India is vulnerable to inflation as it relies on imported oil and demand for food from its 1.2 billion people exceeds supply. The People’s Bank of China said yesterday that inflation may rebound in the second half, while Australia’s central bank said its economy may recover faster than anticipated from the worst global recession since the Great Depression.
“India may be the first one to raise rates,” said Chetan Ahya, a regional economist at Morgan Stanley in Singapore. “The wholesale price inflation that India looks at will be closer to 6 percent by March 2010.”
HSBC Group Plc economist Robert Prior-Wandesforde and Macquarie Group Ltd. economist Rajeev Malik expect interest rates in India to be raised from about April. Nomura Securities Co. economist Sonal Varma brought forward her forecast of a rate increase to January from April.
Besides being buffeted by higher global commodity costs, inflation in India is also fueled by congested roads and ports and power shortages that add to the cost of doing business.
Power Shortages
Almost every manufacturer in India including carmaker Honda Motor Co. has invested in power back-ups because of frequent outages. Peak power shortage for the year ending March 31 will widen to 12.6 percent from 11.9 percent a year earlier, according to the nation’s electricity regulator.
India’s key wholesale price inflation index, announced weekly, has been negative for the six weeks to July 11. The central bank said this was a “statistical effect” as prices included in the gauge rose faster in the same period last year.
Consumer-price inflation is running at between 7 percent and 10 percent, driven by high food costs, according to indexes that measure the cost of living for industrial and farm workers.
Goldman Sachs Group Plc and HSBC say the central bank’s 5 percent inflation forecast is conservative and was likely to be exceeded due to higher costs of oil, food and other commodities.
“We suspect inflation will rise faster, reaching 6 percent to 7 percent by March next year, and that this will prompt a relatively aggressive tightening of interest rates through 2010,” said Mark Williams, international economist at Capital Economics Ltd. in London.
Oil, Sugar
Crude oil, which India imports to meet three-quarters of its needs, has gained 53 percent this year.
India, the world’s biggest consumer of sugar, may need to import at least 4 million metric tons in the year starting Oct. 1 to meet a supply shortfall, said Bajaj Hindusthan Ltd., the nation’s biggest producer by capacity. India is importing the sweetener for the first time in three years and sugar prices are at a three-year high.
Palm oil, of which India is the biggest importer in the world after China, has gained 26 percent this year.
Indian policy makers are not alone in grappling with the prospect of accelerating inflation.
The Chinese central bank said yesterday that inflation may rebound this year, with the consumer-price index bottoming in the third quarter.
Asset Bubbles
China needs to end an excessively loose monetary policy that threatens asset bubbles, overcapacity, bad loans and resurgent inflation, He Fan, a senior researcher at the Chinese Academy for Social Sciences said in Beijing yesterday.
He cautioned that pumping up economic growth in the short term could lead to the nation’s recovery being followed by a second slump. CASS is a government-backed think tank.
China’s consumer prices fell 1.7 percent in June, the fifth straight decline and the biggest drop since 1999.
India’s Subbarao, while flagging inflation concerns, also raised the central bank’s growth forecast to 6 percent “with an upward bias.” That prompted economists to interpret the policy as switching its focus from growth to inflation.
“The RBI is becoming cautiously optimistic on the growth outlook and more concerned about higher inflation,” Varma from Nomura said.
For now, Subbarao said the central bank will continue to provide an “accomodative” policy because growth, constrained by weak global demand for exports and poor farm production on account of scanty rains, may start to revive only after October.
“The RBI statement gives more support to our view that the central bank will start hiking interest rates in early 2010, due to latent inflationary pressures and strengthening aggregate demand,” said Tushar Poddar, an economist at Goldman Sachs in Mumbai.
Source : Bloomberg.com