INFLATION AND INTEREST RATES IN INDIA

ASIA OFFERS RATE STATUS QUO HOPE

Vivek Nair

The Telegraph (Calcutta), September 12, 2011

Mumbai, Sept. 11: The central bankers at four Asian countries — South Korea, the Philippines, Indonesia and Malaysia — have hit the pause button on rate increases even though they have been battling the spectre of rising inflation just as India.

Is there a cue here that Reserve Bank of India governor Duvvuri Subbarao and his bunch of policymakers will take when they hunker down for the mid-quarter review of the monetary policy on September 16?

Early last week, finance minister Pranab Mukherjee said at an event organised by the Confederation of Indian Industry that the central bank could hold off on a rate hike as the economy had started to slow.

“I agree with the finance minister that the RBI should pause on rate hikes,” Planning Commission deputy chairman Montek Singh Ahluwalia said last Thursday.

Bankers and corporate honchos are also beginning to wonder whether Subbarao will abandon his hawkish monetary stance and slam the brakes on the repo rate hikes that started in March last year. The repo has been raised 11 times in about 18 months, going up 325 basis points to 8 per cent — the most frenetic rate increase anywhere in the world. The repo is the rate at which the RBI provides liquidity to banks.

In July — the latest month for which data is available — inflation was running at 9.22 per cent, marginally down from the 9.44 per cent in the previous month. Data for August will come out on September 14, just two days before the RBI policymakers meet to review the monetary policy.

Data for August will be a key factor in deciding whether the RBI hits the pause button. It chose to pass up the opportunity to raise rates only once — on April 24 — out of the past 12 policy review meetings.

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