Mumbai: India's central bank needs to be less wary of the fallout of Europe's debt crisis and raise interest rates to curb inflation stoked by growth, economists said.
Asia's biggest economy after Japan and China expanded 8.6 per cent last quarter from 6.5 per cent in the previous three months, India's statistics office said in New Delhi on Monday.
The acceleration in growth came even as consumer spending slowed, a drag that may lift in coming months, according to HSBC Group Plc economist Frederic Neumann.
The Reserve Bank of India said last month it will be "cautious" in tightening the monetary policy even as the country's consumer-price inflation rate is the highest among Group of 20 nations.
India's stance, in the face of risks to growth posed by Europe's sovereign-debt crisis, may be echoed across the Asia Pacific this week as central banks from Australia to the Philippines set interest rates.
"If India's central bank pays too much attention to Europe and waits for clarity, then it risks falling behind the curve," said Ramya Suryanarayanan, an economist at DBS Bank Ltd. in Singapore. "It is important that interest rates are normalised." She expects a quarter-percentage point increase in rates by the end of June.
The Mumbai-based Reserve Bank has raised interest rates twice since mid-March by a quarter-percentage point each time.
Inflation woes
The bank's benchmark reverse-repurchase rate is 3.75 per cent while the consumer-price inflation rate for industrial workers touched about 13 per cent in April. Prices paid by farm workers are close to 15 per cent, hurting the purchasing power of the 650 million people who live in India's countryside.
In contrast, consumer prices are running at 2.9 per cent in Australia, 3.9 per cent in Indonesia and 4.4 per cent in the Philippines. The Reserve Bank of Australia said in a statement in Sydney yesterday that it left its overnight cash rate target at 4.5 per cent. Bank Indonesia will probably maintain its benchmark rate on June 4 and borrowing costs in the Philippines may be kept unchanged on June 3, according to Bloomberg News surveys.
"The euro jitters may have left policymakers across the world in a more accommodative mood, but in India tightening is now needed to avoid a hard landing later on," HSBC's Neumann said. "They should add some urgency to the tightening cycle."
Benchmark 10-year Indian government bond yields rose 17 basis points last week, the biggest increase in more than a month, as traders increased bets Governor Duvvuri Subbarao will boost rates. The yield climbed 2 basis points to 7.58 per cent at 10.50am in Mumbai yesterday.
The rupee lost 0.7 per cent against the US dollar and the Sensitive Index declined 0.4 per cent in trading in Mumbai.
Markets were little changed after the Purchasing Managers Index released by HSBC Holdings Plc and Markit Economics showed India's manufacturing growth accelerated in May to the fastest pace in more than two years.
India's economy along with Brazil and China may be overheating and developing asset bubbles, said Nouriel Roubini, the New York University professor who predicted the global financial crisis before markets peaked.
Brazil and India are still in a "better shape" than China regarding the strength of domestic demand, Roubini said on Monday in Sao Paulo.
Consumption
As growth in India accelerated last quarter, consumption by individuals and companies increased 2.6 per cent, the weakest pace in eight years, data from the statistics office showed.
"This, presumably, reflects in part soaring food prices, which eroded real disposable incomes and made shoppers generally more cautious," the Hong Kong-based Neumann said. "With agriculture prices now easing, we expect consumption to get a real kick over the coming quarter, helped, too, by rising incomes as a tightening labor market spurs wage growth."
Rains in this year's June-September monsoon season will be "normal," the weather office forecast in April, boosting prospects for agriculture and rural incomes.
Salaries are increasing in urban areas as well with companies including Tata Consultancy Services Ltd., India's biggest exporter of software services, raising employees' pay. Tata Consultancy said in April it plans to spend about $200 million (Dh734 million) on wage increases this year.
The central bank acknowledges that consumer demand is strengthening, making inflation a "visible" concern, Subir Gokarn, who is in charge of monetary policy at the Reserve Bank, said in an interview in Warsaw on May 26.
Still, he said the "pace and magnitude" of monetary policy actions will be "conditioned" by global developments.
Exports: coffee demand recovers
Coffee exports from India, Asia's third-biggest producer, gained 50 per cent in the five months ended May as demand recovered in the biggest importing countries, the state-owned Coffee Board said.
Tata Coffee Ltd and its domestic rivals shipped 129,815 metric tonnes between January and May, compared with 86,654 tonnes a year earlier, Deputy Director N.V. Nagarajaiah said by telephone from Bangalore yesterday. Exports fetched $275 million, 42 per cent more from a year earlier, he said.
India is betting on a rebound in European orders to sustain the gain in exports as the region purchases more than 75 per cent of the nation's output, Ramesh Rajah, president of the Coffee Exporters Association of India said May 10. Italy, Germany and Spain are among the biggest buyers of green coffee from India.
Shipments fetched an average Rs100,311 (Dh8,000) a tonne in the January-May period, compared with Rs108,161 a year earlier, data from the board showed.
Overseas sales since the beginning of the crop season on October 1 jumped to 174,593 tonnes from 122,803 tonnes a year earlier, Nagarajaiah said. Shipments for the period were valued at $371 million, up from $286 million a year earlier.
