Business | Economy
India's central bank must consider 'credit hunger' in setting rates
Headwinds increase to tighten monetary policy and slow G20's fastest inflation rate
- Bloomberg
- Published: 00:00 June 5, 2010
- Image Credit: Bloomberg News
- The Reserve Bank of India in Mumbai. Last week, the RBI eased rules to boost liquidity as operators including Bharti Airtel prepared to pay $14.5 billion (Dh53 billion) for wireless permits.
Mumbai: India's central bank needs to consider a credit crunch while setting interest rates after payment of licence fees for third-generation phone services drained cash, Kaushik Basu, chief economic adviser in the finance ministry, said.
"With the 3G auction and demand for credit having picked up, there is a credit hunger now," Basu, 58, said in an interview in New Delhi yesterday.
"The Reserve Bank of India will need to take stock of it as it balances inflation management and growth in deciding actions on rates."
Governor Duvvuri Subbarao is facing headwinds to tighten monetary policy and slow the fastest inflation rate among Group of 20 nations.
Last week, the RBI eased rules to boost liquidity as operators including Bharti Airtel prepared to pay $14.5 billion (Dh53 billion) for wireless permits.
The move came after the central bank signalled Europe's debt crisis may slow its pace of rate increases.
"Monetary tightening is a given," Shubhada Rao, chief economist at Mumbai-based Yes Bank, said. "It is the timing, which has different scenarios."
Consumer-price inflation for industrial workers climbed more than 13 per cent in April, while prices paid by farm workers rose about 15 per cent.
In comparison, consumer prices are running at 2.2 per cent in the US, 1.5 per cent in the euro zone and 2.8 per cent in China.
The Reserve Bank has raised rates twice since mid-March by a quarter-percentage point each time. The bank's benchmark reverse-repurchase rate is 3.75 per cent.
Twelve of 14 economists surveyed by Bloomberg News this week forecast the central bank may not raise interest rates before the scheduled monetary policy announcement on July 27.
"It is a tight rope walk the RBI has to do — concluding inflation, not damaging the growth potential and making sure there's enough credit," Basu, who taught economics at Cornell University for 16 years before joining the finance ministry in December last year on a two-year sabbatical, said.
Inflation may accelerate in India as economic data released this week signalled strengthening consumer demand.
India's economy grew 8.6 per cent last quarter, the fastest pace after China among major economies, and manufacturing in May expanded the most in more than two years.
The overnight money-market rate touched 5.32 per cent at 9.15am in Mumbai, the highest since March 23, on concern the licence and quarterly payment of company tax will drain money from lenders.
The RBI injected cash for four straight days this week, the longest stretch since November 2008.
The Reserve Bank on May 27 allowed lenders to raise cash by cutting their statutory bond holdings by as much as 0.5 percentage point below the mandated minimum until July 2.
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