Rajan Needs Help From New Delhi in
Inflation Fight
The Wall Stree Journal
While India’s central bank head Raghuram Rajan stuck to his guns in his standoff with inflation, raising interest rates Tuesday, economists said he will need more help from New Delhi to successfully arrest rising prices.
While India’s central bank head Raghuram Rajan stuck to his guns in his standoff with inflation, raising interest rates Tuesday, economists said he will need more help from New Delhi to successfully arrest rising prices.
On Tuesday the Reserve Bank of India governor raised India’s key overnight lending rate by a quarter percentage point to 7.75%. While the hike was expected, it was the second consecutive rate increase by Mr. Rajan since he took office last month, reversing an earlier easing trend started by his predecessor.
The RBI had lowered rates by 1.25 percentage points from April 2012 to May 2013 as inflation at that time seemed in control. A sharp depreciation in the rupee, which makes imports more expensive, has since fanned the flames of inflation and forced the central bank to turn hawkish.
“Curbing mounting inflationary pressures and managing inflation expectations will help strengthen the environment for growth by fostering macroeconomic and financial stability,” Mr. Rajan said after announcing the rise in interest rates Tuesday.
Wholesale prices—the most closely followed indicator of inflation in India—jumped to a seven-month high of 6.46% in September. It has been stuck above the central bank’s comfort level of 5% for more than four months. Meanwhile India’s consumer price index, less important for the country’s policy makers but an important indicator of how India’s poor are being affected, has recently been hovering near 10%.
Mr. Rajan has had to make tough decisions to deal with inflation even as India is caught in a painful slowdown.
Growth in gross domestic product dipped to a 10-year low of 5% in the fiscal year ended March, compared with above 9% seen in the years before. Next year will likely be worse for the south Asian nation, economists say.
The Asian Development Bank recently slashed its growth forecast for India to 4.7% for the year ending next March from a previous prediction of 6.0%.
If India wants to get out of this rut New Delhi and the Mumbai-based RBI have to work together. New Delhi needs to open its economy more and lower government spending which is pushing up interest rates and demand, economists said. The central government also needs to help encourage investment in the country’s overburdened supply chains, roads, ports and power plants which exacerbate inflation by adding to costs of delivery and production.
“In this kind of situation where pressure is coming from high food prices so monetary policy will be less effective,” by itself at keeping prices from rising, said Siddhartha Sanyal, India economist at Barclays Capital.
The government will have to take measures to lift the supply of foods, he said, such as allowing more vegetable imports. The government will also have to reform the process through which land is acquired and infrastructure is built, he added.
“Bringing about a sustained recovery in growth and inflation down, however, also hinges importantly on the government moving from the announcement to the implementation of structural reforms,” which encourage investment and reign in government spending, Leif Eskesen, HSBC’s chief economist for India and Southeast Asian countries said in a report Tuesday.
“With inflation risks still tilted to the upside, the RBI has to keep its inflation guards up and stand ready, if needed, to raise rates further to bring inflation under control.
However, the RBI cannot do all of this alone and the government needs to chip in with structural reforms and fiscal consolidation.”
– Anant Vijay Kala contributed to this post.
On Tuesday the Reserve Bank of India governor raised India’s key overnight lending rate by a quarter percentage point to 7.75%. While the hike was expected, it was the second consecutive rate increase by Mr. Rajan since he took office last month, reversing an earlier easing trend started by his predecessor.
The RBI had lowered rates by 1.25 percentage points from April 2012 to May 2013 as inflation at that time seemed in control. A sharp depreciation in the rupee, which makes imports more expensive, has since fanned the flames of inflation and forced the central bank to turn hawkish.
“Curbing mounting inflationary pressures and managing inflation expectations will help strengthen the environment for growth by fostering macroeconomic and financial stability,” Mr. Rajan said after announcing the rise in interest rates Tuesday.
Wholesale prices—the most closely followed indicator of inflation in India—jumped to a seven-month high of 6.46% in September. It has been stuck above the central bank’s comfort level of 5% for more than four months. Meanwhile India’s consumer price index, less important for the country’s policy makers but an important indicator of how India’s poor are being affected, has recently been hovering near 10%.
Mr. Rajan has had to make tough decisions to deal with inflation even as India is caught in a painful slowdown.
Growth in gross domestic product dipped to a 10-year low of 5% in the fiscal year ended March, compared with above 9% seen in the years before. Next year will likely be worse for the south Asian nation, economists say.
The Asian Development Bank recently slashed its growth forecast for India to 4.7% for the year ending next March from a previous prediction of 6.0%.
If India wants to get out of this rut New Delhi and the Mumbai-based RBI have to work together. New Delhi needs to open its economy more and lower government spending which is pushing up interest rates and demand, economists said. The central government also needs to help encourage investment in the country’s overburdened supply chains, roads, ports and power plants which exacerbate inflation by adding to costs of delivery and production.
“In this kind of situation where pressure is coming from high food prices so monetary policy will be less effective,” by itself at keeping prices from rising, said Siddhartha Sanyal, India economist at Barclays Capital.
The government will have to take measures to lift the supply of foods, he said, such as allowing more vegetable imports. The government will also have to reform the process through which land is acquired and infrastructure is built, he added.
“Bringing about a sustained recovery in growth and inflation down, however, also hinges importantly on the government moving from the announcement to the implementation of structural reforms,” which encourage investment and reign in government spending, Leif Eskesen, HSBC’s chief economist for India and Southeast Asian countries said in a report Tuesday.
“With inflation risks still tilted to the upside, the RBI has to keep its inflation guards up and stand ready, if needed, to raise rates further to bring inflation under control.
However, the RBI cannot do all of this alone and the government needs to chip in with structural reforms and fiscal consolidation.”
– Anant Vijay Kala contributed to this post.
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