NEW DELHI, April 28: India’s central bank faces a tough dilemma this week as it decides whether to ramp up its inflation fight amid warnings that too harsh credit conditions could damage an already slowing economy.
Overly aggressive monetary tightening by central bankers at their annual policy meeting on Tuesday could tip Asia’s third-largest economy into a longer-term downturn after its rip-roaring growth, economists say.
Upward interest “rate moves will have a bigger depressing impact on growth than on inflation,” which has been mainly driven by soaring global commodity prices for food and fuel, said HSBC senior economist Robert Prior-Wandesforde.
India entered a long slowdown in 1997 “and the most visible trigger was a sharp rate rise,” noted India’s HDFC Bank chief economist Abheek Barua.
But while the country’s economic engine is losing steam, inflation holds centre stage after more than doubling in four months to hit 7.33 per cent last week a three-year peak.
Curbing prices has become the key goal of the left-leaning Congress-led government, which fears a voter backlash with general elections due in a year and a host of state polls in-between.
Last week’s inflation number came days after the Reserve Bank of India stepped up its inflation battle by reducing cash available for commercial loans in a bid to cool demand.
The bank hiked by 50 basis points the funds that commercial banks must park in their coffers the so-called cash reserve ratio or CRR to a seven-year high of 8.0 per cent.
Economists are unanimous that the bank will keep up its tough anti-inflation talk at its meeting but are split on whether it will raise so-called “signal interest rates.”
The Mumbai-based bank “will maintain a hawkish stance” and there is a chance of a quarter-point rise in both the repo and reverse repo rates, said Yes Bank’s Chief Economist Shubhada Rao.
The repo rate is the bank’s main inflation-fighting tool through which it lends cash to banks and influences commercial borrowing costs. It now is at a six-year high of 7.75 per cent.
The reverse repo the rate at which it absorbs excess cash -- stands at 6.0 per cent.
Other economists expect the bank to take a wait-and-see stance after forecasts last week of record grain harvests.
“There have been some positive domestic developments,” said Dharma Kriti Joshi, principal economist at Crisil credit rating agency.
“If the bank is extra cautious, it could raise rates but with the adverse global scenario and the tightening already taken, economic growth is already on a downward trajectory and so demand pressure is easing up on its own,” he said.
“My view is they will maintain a very hawkish stance but stand pat on rates,” he said.
JP Morgan Asia economist Rajeev Malik also said the bank was “likely to hold fire” on raising rates but will sound “hawkish.”
The bank has been tightening aggressively since late 2004 to keep a lid on prices.—AFP
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