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India expected to hold rates on inflation worries
RAJAN… he has raised rates three times to clamp down onrising prices.
Business
August 5, 2014

India expected to hold rates on inflation worries

MUMBAI, India — (AFP) India’s Central Bank will likely keep interest rates on hold starting yesterday as it waits to assess the impact of weak annual rains on food prices, economists said.

Reserve Bank of India (RBI) chief Raghuram Rajan, known as an inflation hawk, is unlikely to cut borrowing costs although June’s consumer price index (CPI) was at a 30-month low, they added.

“The RBI will be on a watchful status quo since it needs time to assess the impact” on food price inflation of a below-average monsoon and “any drought situation that might emerge”, Rajiv Biswas, chief Asia economist for global consultancy IHS, told AFP.

The RBI’s trend-setting repo rate — at which the central bank lends to commercial banks — stands at a steep eight per cent which businesses say discourages investment needed to help India’s economy get back on its feet.

Since Rajan took over as governor last September, he has raised rates three times to clamp down on rising prices, even with the economy growing at subfive per cent for a second straight year and business clamouring for monetary easing.

Indian farmers rely for irrigation largely on the annual rains, which are more than 20 per cent below average so far this year.

Although June’s consumer price index, closely watched by the central bank, rose by its slowest pace since January 2012, climbing 7.31 per cent from a year earlier, Rajan will want further evidence inflation is slowing before cutting rates, economists say.

The RBI “is likely to pause again in August to get a better sense of the inflation trajectory”, HSBC’s Frederic Neumann said.

India’s economy and inflation levels remain highly vulnerable to any sharp rise in global crude oil prices as New Delhi imports more than 80 per cent of its oil needs.

IHS’s Biswas said chances of a rate hike by the RBI in the near-term were slim as it “will not help the economy already struggling. In any case, factors like rainfall and oil price shocks are really out of RBI’s control”.

But economists, such as Mole Hau at BNP Paribas, believe another round of rate hikes could come in 2015 if the Central Bank wants to meet its target of cooling consumer price inflation to six per cent by 2016.

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