India's central bank likely to hold rates

India's central bank is likely to hold interest rates at a near decade-low in its policy review this month and the monetary stance can continue until inflationary pressures rise, a top policy adviser said. The Reserve Bank of India (RBI) holds its quarterly review on October 27, and it is widely perceived the primary objective will be to help the economy recover fully from the shocks of global slowdown.
"I don't think the RBI will revise interest rates in the policy review," C. Rangarajan, chairman of the prime minister's Economic Advisory Council, told reporters on Wednesday. "So long as inflationary pressures are moderate, the current monetary stance can continue," he said. The former central bank governor said the RBI could first stop open market purchase of bonds and then start draining excess liquidity to fight inflationary pressures.
Last week, RBI Governor Duvvuri Subbarao said there was broad agreement India needed to step back from its easy policy stance, but he did not set a timeframe. India and South Korea are widely seen as the first Asian economies likely to follow Australia's rate increase last week. Faster industrial output growth and rising inflationary pressures have strengthened case for an end to the RBI's accommodative monetary stance next year.
"Rising food prices are a matter of concern. It (inflation) may go up to 5-6 percent by March end," Rangarajan said. The RBI has estimated inflation at around 5 percent but private analysts peg it as high as 8 percent by the end of March. He said there was always a seasonal decline in prices in November and December.
"One might want to wait and see whether seasonal decline occurs or not and take action after the behaviour of prices in November and December." "It is the perception of RBI that will count," he said. India's industrial output grew at its fastest pace in 22 months in August at 10.4 percent, beating analysts forecast and driving bond yields higher.
This lifted growth to 5.8 percent during April-August, and Rangarajan expects faster expansion in the remaining part of the year. "It is not a flash in the pan and my assessment is it will go up to 8 percent in this financial year," he said. Robust industrial growth could offset the impact of a 2 to 2.5 percent contraction in farm output, and help the economy grow between 6 and 6.5 percent in 2009/10, Rangarajan said.
Rising sales of household goods and cars have been helped by aggressive rate cuts by the central bank and the government's duty cuts and a record 10 trillion rupees ($217 billion) spending plan for 2009/10. "There is no question of contraction of expenditure this fiscal," he said. The consolidated fiscal deficit of the federal and state governments could be between 10 and 10.2 percent of gross domestic product in 2009/10, while current account deficit could touch 2 percent of GDP, he said.