India's real rate of inflation rate is understated, and the central bank must do more to stem short-term capital inflows that have pushed the rupee up and fuelled liquidity, the chief economist of Standard Chartered Bank said on Sunday.
India has been taking steps to slow the inflow of foreign capital which has sent the rupee to its highest in nearly 10 years against the dollar and affected some labour-intensive merchandise exports such as textiles and handicrafts.
Gerard Lyons, Chief Economist and Group Head of Global Research at Standard Chartered Bank, told the World Economic Forum's India Summit that while India's economic growth was impressive, it was "inevitable" that the numbers would become more volatile, particularly as the US economy slowed next year.
"The good is the economic outlook, the bad is the inflation prospect, and the ugly is the currency issue," Lyons said.
"Inflation is being suppressed, and it is likely to become a bigger issue in the next couple of years." India's wholesale price inflation, the most widely watched measure, is at its lowest in five years, just above 3 percent annually in November, but analysts say the low reading masks the real picture, which is probably much higher than the official data and closer to less frequently published consumer price inflation of about 5.5 percent. "The two sources of inflation here in India are liquidity and fuel prices. Thankfully, as yet inflation expectations and also wages have not yet risen, but this is a growing problem," Lyons said.
The government puts a ceiling on retail fuel prices and has been reluctant to raise them, even though global oil prices have neared $100 a barrel. State-run oil firms are losing $50 million a day as they have to sell petrol and diesel below market prices, which keeps inflation artificially low. India, the world's fastest growing major economy after China, has expanded at an average 8.6 percent a year in the past four years and growth for this fiscal year is expected to come in at a similar level, despite a series of tightening measures by the central bank.
The central bank has repeatedly expressed its concern that higher oil prices are not passed through to domestic prices, which it says poses a risk to the economy. "Thankfully, the central bank has tightened policy. It's also tried to tighten up short-term capital inflows, but it's not really doing enough, and it will need to do more," Lyons said.