India: trying to dampen inflation

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India’s inflation rate has eased a little – but not enough to prevent at least one more interest rate increase.

Wholesale prices rose 9.2 per cent last month, down from 9.4 per cent in June and 9.6 per cent in May, according to data published on Tuesday. So the trend is clearly down. But the deceleration is so slow that the Reserve Bank of India seems certain to raise rates at least once more in the current cycle – probably next month by 25 basis points.

As Samiran Chakraborty of Standard Chartered Bank told beyondbrics, the decline in the headline rate was “marginal” and mostly due to a drop in food inflation and not in core inflation. He said:

Concerns about inflation at the RBI won’t be changed – they will be the same as they were before [the numbers were published]. It’s quite possible there will be another rate increase in September.

Policymakers hope that a good monsoon will ease price pressures further in the food market. But, while that will bring great relief to India’s many poor people, it will not have a big impact on core inflation – which is under pressure from supply-side shortages, ranging from a lack of qualified labour to infrastructure bottlenecks.

Central bank governor Duvvuri Subbarao (pictured) said last week that it was crucial that inflation and inflationary expectations were reduced. For many analysts, that was a clear signal of the RBI’s intentions.

But central bank officials, who have raised rates 11 times since the start of last year, are anxious that increasing rates won’t do too much damage to growth prospects and the government’s plans of achieving an 8.5 per cent GDP increase in the financial year to March 2012.

As the FT has reported, these are some signs the economy is slowing: car sales decreased 16 per cent last month, the first decline in nearly three years.

Chakraborty said it took time in India for interest rate increases to bite, but once they did, the central bank could quickly switch tack and start cutting – perhaps in mid-2012.

But, given the uncertainty in global markets as well as the many vagaries of the fast-developing Indian economy, Subbarao and colleagues are likely to play it safe. The record of the last two years suggests they will.

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