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A meeting of India's central bank Governor Duvvuri Subbarao with Finance Minister Pranab Mukherjee fuelled speculation on Friday that the bank may tighten monetary policy earlier than expected to stem rising prices. The Congress-led government is under pressure to tackle spiralling food prices, an issue which can carry a high political cost in a country with millions on marginal incomes, and which has sparked protests and walkouts in parliament.
"I have come for a routine meeting with the finance minister," Subbarao said. "Of course, when I meet the finance minister I discuss about the macroeconomic situation." He did not elaborate when asked whether rising food prices would lead to a policy change.
While it is not unusual for the two officials to discuss the economy, analysts said the meeting could be a prelude to an earlier-than-expected interest rate rise. "Headline inflation numbers have indeed caused an agitation in political circles as well, and it is not surprising that monetary authorities and the finance ministry would meet to discuss the issue on a more urgent basis," said Atsi Sheth, chief economist at Macro-Sutra in Mumbai.
"I think the stage is slowly being set for a tightening in the next few weeks rather than at the end of January." News of the meeting pushed up the yield on the 10-year benchmark bond, ending at 7.72 percent after rising as high as 7.74 pct, a level last seen in October 2008.
The yield, which ended at 7.64 percent on Thursday, has risen 51 basis points since late November, when data showing the economy grew an annual 7.9 percent in the September quarter, its fastest in 18 months, boosted the market's view of a tightening. Data on Thursday showed that food prices surged an annual 20 percent in early December as this year's poor monsoon hit crops.
The Reserve Bank of India's next scheduled policy review is at the end of January, but it can change policy settings at any time. Of the six cuts in the repo rate between October 2008 and April, only the last came at a scheduled review. In a report to parliament on Friday, the finance ministry said pressure on food prices was likely to continue, and food imports could help stem price rises. It also said a surge in capital inflows could lead to an inflationary spiral.
The ministry said strong growth in the September quarter opened up the possibility that the economy could grow more than 7.75 percent, the top of the current forecast range, in thhe fiscal year to March 2010. Food prices are soaring because of shortages after crops were hit by the weakest monsoon rains in 37 years, followed by flooding in parts of the country.

Copyright Reuters, 2009

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