India’s central bank needs to be less wary of the fallout of Europe’s debt crisi

s and raise interest rates to curb inflation stoked by growth, economists said.
Asia’s biggest economy after Japan and China expanded 8.6 percent last quarter f
rom 6.5 percent in the previous three months, India’s statistics office said in
New Delhi yesterday. The acceleration in growth came even as consumer spending s
lowed, a drag that may lift in coming months, according to HSBC Group Plc econom
ist Frederic Neumann.
The Reserve Bank of India said last month it will be “cautious” in tightening th
e monetary policy even as the country’s consumer-price inflation rate is the hig
hest among Group of 20 nations. India’s stance, in the face of risks to growth p
osed by Europe’s sovereign-debt crisis, may be echoed across the Asia Pacific th
is week as central banks from Australia to the Philippines set interest rates.
“If India’s central bank pays too much attention to Europe and waits for clarity
, then it risks falling behind the curve,” said Ramya Suryanarayanan, an economi
st at DBS Bank Ltd. in Singapore. “It is important that interest rates are norma
lized.” She expects a quarter-percentage point increase in rates by the end of J
une.
The Mumbai-based Reserve Bank has raised interest rates twice since mid-March by
a quarter-percentage point each time.
Consumer Prices
The bank’s benchmark reverse-repurchase rate is 3.75 percent while the consumer-
price inflation rate for industrial workers touched about 13 percent in April. P
rices paid by farm workers are close to 15 percent, hurting the purchasing power
of the 650 million people who live in India’s countryside.
In contrast, consumer prices are running at 2.9 percent in Australia, 3.9 percen
t in Indonesia and 4.4 percent in the Philippines. The Reserve Bank of Australia
may leave the overnight cash rate target at 4.5 percent today, according to a B
loomberg News survey. Bank Indonesia will probably maintain its benchmark rate o
n June 4 and borrowing costs in Philippines may be kept unchanged on June 3, sep
arate surveys showed.
“The euro jitters may have left policy makers across the world in a more accommo
dative mood, but in India tightening is now needed to avoid a hard landing later
on,” HSBC’s Neumann said. “They should add some urgency to the tightening cycle
.”
Yields Rise
Benchmark 10-year Indian government bond yields rose 17 basis points last week,
the biggest increase in more than a month, as traders increased bets Governor Du
vvuri Subbarao will boost rates. The yield closed at 7.56 percent yesterday.
The rupee lost 4.3 percent against the U.S. dollar last month and the Sensitive
Index declined 3.5 percent in the period.
India’s economy along with Brazil and China may be overheating and developing as
set bubbles, said Nouriel Roubini, the New York University professor who predict
ed the global financial crisis before markets peaked.
Brazil and India are still in a “better shape” than China regarding the strength
of domestic demand, Roubini said yesterday in Sao Paulo.
As growth in India accelerated last quarter, consumption by individuals and comp
anies increased 2.6 percent, the weakest pace in eight years, data from the stat
istics office showed.
“This, presumably, reflects in part soaring food prices, which eroded real dispo
sable incomes and made shoppers generally more cautious,” the Hong Kong-based Ne
umann said. “With agriculture prices now easing, we expect consumption to get a
real kick over the coming quarter, helped, too, by rising incomes as a tightenin
g labor market spurs wage growth.”
‘Normal’ Rains
Rains in this year’s June-September monsoon season will be “normal,” the weather
office forecast in April, boosting prospects for agriculture and rural incomes.
Salaries are increasing in urban areas as well with companies including Tata Con
sultancy Services Ltd., India’s biggest exporter of software services, boosting
employees’ pay. Tata Consultancy said in April it plans to spend about $200 mill
ion on wage increases this year.
The central bank acknowledges that consumer demand is strengthening, making infl
ation a “visible” concern, Subir Gokarn, who is in charge of monetary policy at
the Reserve Bank, said in an interview in Warsaw on May 26. Still, he said the “
pace and magnitude” of monetary policy actions will be “conditioned” by global d
evelopments.
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