India Seeking to Slow Inflation, Chidambaram Says (Update3)
By Cherian Thomas and Sumit Sharma
Nov. 3 (Bloomberg) -- India's Finance Minister Palaniappan Chidambaram said the government's ``immediate'' goal is to slow inflation to 4 percent and prevent the world's second-fastest growing economy from overheating.
``Some sectors are witnessing credit growth at a very high rate,'' Chidambaram told bankers at a conference in the southern city of Hyderabad today. ``One must be on guard to see that asset bubbles don't build up, nor do they lead to overheating.''
Reserve Bank of India Governor Yaga Venugopal Reddy this week raised the bank's overnight lending rate by a quarter percentage point for the fourth time this year. Record lending by banks to buyers of homes and vehicles is threatening to fuel inflation after three years of more than 8 percent average economic growth, a pace second only to China among the world's 20 top economies.
``We see inflation on a rising trajectory in the second half of the fiscal year,'' said Sri Prasad Prabhu, a Mumbai- based fixed-income analyst at IDBI Capital Market Services Ltd., a primary dealer that underwrites government debt sales. ``Inflation will be driven by demand pull pressures and prices of food products because of a shortfall.'' He expects inflation to accelerate to as much as 7 percent toward the end of the fiscal year on March 31.
Inflation rose to a more than four-month high of 5.41 percent in the third week of October, the government said today. Consumer prices paid by urban dwellers rose to a seven-year high of 6.6 percent in September, with prices paid by farmers reaching almost an eight-year high of 7.34 percent.
The yield on the 7.59 percent note due April 2016 rose 4 basis points, or 0.04 percentage point, to 7.64 percent as of 1 p.m. in Mumbai, according to the central bank's trading system. The price fell 0.275, or almost 28 paise per 100-rupee face amount, to 99.67. Bond yields move inversely to prices.
Record Growth
India's economy has grown an average 8.2 percent since 2003, the fastest since the country's independence in 1947.
Expansion may exceed 8 percent for the fourth year in a row amid signs of higher inflationary expectations, Chidambaram said, calling rising prices the ``most worrying signal'' in the economy. Banks must slow lending to ``overheated sectors'' such as real estate while the government will consider monetary and fiscal steps to curb price rises, he said.
``While it is a good sign that people are willing to leverage current earnings over a longer term and acquire assets of a much larger size, we must be on guard on this,'' Chidambaram said. ``We must ensure asset bubbles don't build up in some of these sectors, nor does it lead to overheating in some of these sectors.''
Bank loans to companies and individuals doubled in the past three years and rose 30.5 percent since the start of the financial year on April 1. Demand for money is increasing as India tops a global consumer confidence index of 40 countries for the third year in a row in 2006, according to AC Nielsen Co., a New York-based market research firm.
Chidambaram urged bankers to ``rebalance'' their loan portfolio as retail credit has increased 44 percent and housing loans doubled during the past year.
The minister also said inflation will remain high as long supply of food grains lag demand. He is concerned about the ``supply side,'' Chidambaram said.
Supply Shortages
India has been trying to lower the prices of food grains by banning the export of pulses, cutting the import duty on wheat and allowing non-state companies to import wheat and sugar. The government on Sept. 9 cut the import duty on wheat to zero for non-state companies after reducing it to 5 percent in June.
India, the world's biggest importer of wheat this year, on Oct. 30 raised prices it guarantees farmers for their crop to encourage them to boost planting amid a shortage. Chidambaram said the remuneration was ``attractive''.
``Inflation can really get out of hand given shortage in food supplies and rising demand for manufactured products,'' said D. H. Pai Panandiker, president, RPG Foundation, an economic policy group in New Delhi. ``The government will be concerned as elections are round the corner.''
Higher inflation may become a political liability for the ruling Congress party, which faces seven state elections next year. The most important contest is in Uttar Pradesh, the largest of India's 28 states, which sends a seventh of all lawmakers to the lower house of Parliament.
India's central bank on Oct. 31 unexpectedly left the reverse repurchase rate at which it borrows overnight unchanged, while increasing the repurchase rate, or the bank's overnight lending rate, to 7.25 percent.
By raising the repurchase rate, the central bank is trying to increase the cost of retail and housing loans while averting the risk of a sudden collapse in record property and share prices.
To contact the reporter on this story: Cherian Thomas in Hyderabad at cthomas1@bloomberg.net ; Sumit Sharma in Hyderabad at sumitsharma@bloomberg.net |
