India's central bank chief: Inflation more intense than expected
- From: Chim <ChimS1@xxxxxxx>
- Date: Tue, 15 Apr 2008 14:08:48 -0700 (PDT)
India's central bank chief: Inflation more intense than expected
By Polya Lesova, MarketWatch
Last update: 4:18 p.m. EDT April 15, 2008
NEW YORK (MarketWatch) -- Reserve Bank of India Governor Y.V. Reddy
said Tuesday that India's inflation is far more intense than the
central bank anticipated, and that "it is a time of uncertainties"
about the direction of monetary policy.
Balancing concerns about growth and inflation "is a very difficult
question," Reddy said Tuesday at a panel discussion on India organized
by Columbia University's World Leaders Forum.
Following the meetings in Washington, D.C., this weekend, "we
concluded that it is so difficult we should keep thinking," Reddy
said. "I don't think one can take a very certain view on that one."
Soaring inflation, particularly that of food, has moved to the top of
the agenda for policy makers worldwide, and was a topic of discussion
at meetings of the International Monetary Fund and the World Bank over
the weekend in Washington.
Riots over surging food prices have broken out recently in the
Philippines, Haiti and Egypt. India, Cambodia, and Vietnam are among
the countries that have imposed restrictions on exporting food staples
like rice.
"We're sensitive to these developments," Reddy said. Food prices have
come "under some pressure" recently because of global conditions, he
said.
Soaring inflation
India's most closely watched inflation indicator has soared to its
highest level since November 2004. The wholesale price index-based
inflation rate soared to 7.41% year on year in the week ending March
29 from 7.00% a week earlier, according to data released Friday.
Inflation is currently well above the central bank's comfort zone of
around 5%.
India's inflation is "higher than our tolerance rate...and requires
continuous monitoring," Reddy said, but he didn't give any other
specifics about the future direction of monetary policy.
India's repurchase, or overnight lending, rate currently stands at
7.75%.
The diversion of food for the production of biofuels, such as ethanol,
is "difficult to defend," Reddy said.
Jagdish Bhagwati, an economist and professor at Columbia University,
who moderated the discussion, brought up the Doha round of global
trade talks which have stalled because of disagreement over U.S. farm
subsidies.
"Now that commodity prices have moved up like mad, it might be
possible for the U.S. to do something about subsidies," Bhagwati
said.
India's "stabilizing role"
Reddy said in the current environment of financial turbulence, India
is playing a "stabilizing role. India has not been contributing to the
global macroeconomic imbalances."
Still, the central bank governor said that India's equity markets
"have been volatile in recent months."
In fact, India's stock market has significantly underperformed its
emerging market peers this year. The MSCI India index is down 26% this
year, making it one of the worst performers in the world. Mumbai's
Sensex benchmark stock index has dropped 20% year-to-date.
But Reddy said Indian banks have a strong capital base: "The Indian
financial sector is likely to be less affected by contagion than other
emerging markets."
Among India's main challenges, the central bank governor identified
the eradication of poverty, the efficient use of water, boosting
agricultural production and improving infrastructure.
Polya Lesova is a MarketWatch reporter based in New York.
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