India's central bank signaled it may raise interest rates in a measured manner as Europe's debt crisis outweighs inflation concerns.
Global economic conditions have changed in the past six weeks and a "cautious pace is the best way to go and that is the stance," Subir Gokarn, the deputy governor in charge of monetary policy at the Reserve Bank of India, told reporters in Thiruvananthapuram, India, today. "I am aware rates are quite out of line with inflation and the growth scenario."
India and China, the world's fastest-growing major economies, are struggling to control inflation amid risks to growth emanating from debt woes of Greece, Portugal and Spain. Rising prices in India is a "big worry" as consumer demand strengthens, Governor Duvvuri Subbarao said today.
"The RBI's stance indicates it will follow the path of slow interest-rate increases to curb inflation and also protect the economy from the global turmoil," said Dharmakirti Joshi, chief economist at Crisil Ltd., the Indian unit of Standard & Poor's. "Interest rates will go up, but in a gradual way."
The European Union and International Monetary Fund cobbled together a 110 billion-euro ($136.4 billion) rescue package for Greece on May 2 to prevent contagion. About a week later, European leaders drew up an unprecedented emergency fund of as much as 750 billion euros to back countries facing instability and a program of bond purchases by the European Central Bank.
Limited Impact
The government will protect the Indian economy from the crisis in Europe, Finance Minister Pranab Mukherjee said in an interview with the NDTV Profit television channel today.
Subbarao on April 20 raised the central bank's benchmark interest rates by a quarter percentage point for the second time in a month, increasing the reverse repurchase rate to 3.75 percent and the repurchase rate to 5.25 percent. The next monetary policy statement is scheduled for release on July 27.
In China, where industrial production rose 17.8 percent in April, consumer prices climbed at the fastest pace in 18 months, adding pressure on policy makers to raise interest rates and allow yuan gains. China has raised banks' reserve requirements three times this year.
India's benchmark wholesale-price inflation rate climbed 9.59 percent in April as demand for cars and houses increased.
India's industrial production grew 13.5 percent in March, rising more than 10 percent for a sixth straight month.
Factory Output
Factory output is gaining strength in India as wages rise. Salaries in India may grow at the fastest pace in the Asia Pacific this year, according to Hewitt Associates Inc., the Lincolnshire, Illinois-based human resources adviser.
Cement production by companies including ACC Ltd., India's biggest cement maker, gained 10.1 percent in March, the government said on April 27.
Subbarao and Gokarn are in Thiruvananthapuram for a meeting of the central bank's board of directors tomorrow. The board includes Azim Premji, chairman of Wipro Ltd., India's third- largest software provider, and Kumar Mangalam Birla, chairman of Hindalco Industries Ltd., the nation's largest aluminum producer.
Concerns about Europe caused the Sensitive Index to fall the most in four months today, declining 2.8 percent on the Bombay Stock Exchange. The rupee weakened the most in 15 months, closing at 46.3550 per dollar as of the 5:00 p.m. close in Mumbai, while the yield on the 10-year government bond fell five basis points to 7.44 percent, the lowest in more than five months.
To contact the reporter on this story: Anoop Agrawal in Thiruvananthapuram at Aagrawal8@bloomberg
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