India will continue exit strategy

Mumbai: India's central bank, Reserve Bank of India, will continue exiting stimulus after unexpectedly raising its benchmark interest rate last week, Governor Duvvuri Subbarao said.

"It is better to take action now and continue the exit strategy," Subbarao said at an event in Mumbai yesterday. "We may have to sacrifice on growth in the near term."

India is tightening monetary policy ahead of other countries as growth is "consolidating" and inflation pressures are "stronger than we anticipated", Subbarao said, reiterating comments he made on March 22. The pace of price increases is worse than "elsewhere", Subbarao said.

The Reserve Bank of India increased borrowing costs by a quarter percentage point on March 19, raising the benchmark reverse repurchase rate to 3.5 per cent and the repurchase rate to 5 per cent, to contain inflation and reduce the risk of a hard landing. Goldman Sachs said after the rate increase that India was "complacent" about checking price gains.

The benchmark wholesale-price inflation rate touched a 16-month high of 9.89 per cent in February, with prices of manufacturing and services contributing half the gains, according to the central bank. Consumer prices paid by industrial workers in India rose 16.2 per cent in January from a year earlier, according to government data.

The rate of inflation will be "very low" by the end of June and India isn't "behind the curve" in containing it, Kaushik Basu, chief economic adviser at India's finance ministry, said on the sidelines of the event yesterday at which Subbarao spoke.

Growth path

"From this quarter, India is going to be on an 8.5 per cent growth path. We will be getting to 9 per cent growth from March 2011. That is pretty much on the cards."

India's $1.2 trillion (Dh4.40 trillion) economy, Asia's biggest after Japan and China, may expand 8.2 per cent in the next fiscal year, compared with 7.2 per cent in the year to March 31, the Finance Ministry said in February.