India's inflation well contained: World Bank

India's annual inflation of 6.5 percent is not that high when considering the nation's strong economic growth, a senior World Bank official said on Tuesday. The Indian economy is forecast to grow 9 percent this year, the same pace of growth estimated for 2006, making it one of the fastest-growing economies in the world, said Isabel Guerrero, the World Bank's country director for India.
The Reserve Bank of India (RBI) has been raising interest rates on concern that the economy might be overheating, but it is also "playing by ear" how its policy action could affect future economic growth, she said.
"That shows they are concerned about inflation but not as much because inflation is still quite low," Guerrero said in an interview. She was in Tokyo with other World Bank South Asia country directors to meet Japanese officials.
The RBI raised its repo rate by 25 basis points to 7.75 percent in March, its highest in nearly 4-1/2 years, saying it was critical to take "demonstrable and determined action" to fight inflation.
Annual inflation, as measured by wholesale prices, is running at nearly 6.5 percent, which is well above the central bank's comfort zone of 5.0-5.5 percent. But Guerrero, who oversaw Latin American countries at the World Bank before assuming her current post in March, said annual inflation of 6.5 percent is "not really high" and inflation staying below 10 percent is in fact "very good."
For a country achieving growth as high as India's, it is hard to tell whether inflation is caused by economic overheating or by high capacity needs, Guerrero said.
"It could be consumption overheating, but it could very much be high (economic) growth, and high growth always puts a strain on the productive capacity of an economy," she said.
Guerrero also said that by maintaining certain financial market controls, such as limiting the presence of foreign banks operating in the nation, India remains less vulnerable to financial market shocks such as the one that hit much of Asia in the late 1990s. "The risks of destabilising inflows and outflows is less (in India) than in other countries, and I think (the government) has done the right thing by being careful" about opening up its financial markets, she said.
India's economy, Asia's fourth largest, is estimated to have grown 9.2 percent in the financial year that ended March 31, growth that has attracted foreign fund inflows and prompted the central bank to hike rates in March.