Inflation-plagued India seen hiking rates again

NEW DEHLI: India looks set this week to hike borrowing costs for a second time in a month as it battles the highest inflation among the leading Group of 20 economic powers, analysts say.

The central bank is widely expected to increase interest rates to tackle surging prices which began in the food sector but have spilled over into other parts of India’s fast-accelerating economy.

“India is facing its worst inflation problem in a decade,” said Nikhilesh Bhattacharyya, economist at Moody’s Economy.com, who expects 25-basis-point rises in the bank’s two leading short-term interest rates. Over the last seven months, annual food inflation in Asia’s third-largest economy has swung between 13 and 20 percent, causing huge hardship, especially among the 450 million people who struggle below the poverty line.

Economic commentator Paranjoy Guha Thakurta told AFP: “There’s a huge amount of discontent and anger across the country and certainly among the poor. Speak to the person on the street and their biggest problem is inflation.”

The soaring food prices have fuelled overall inflation, which has been in double-digits for five months and now stands at 10.55 percent – a far cry from countries such as the United States, where inflation is running at 1.1 percent.

“India is battling inflation at a time when most of the developed economies are trying hard to ward off deflation. There’s no common rule that fits all countries,” noted former central bank governor YV Reddy.

The bank has hiked rates three times this year but inflation is still stubbornly high – driven by surging incomes, low farm output and a rebounding economy running up against capacity constraints as supply struggles to keep pace with demand.

The economy is forecast to expand by 8.5 percent in the fiscal year ending in March 2011, up from 7.4 percent last year. Prime Minister Manmohan Singh’s Economic Advisory Council expects growth to hit nine percent next year.

Council chairman C Rangarajan says more rate hikes are needed and insists the economy can still grow strongly with them.

The BJP has warned it will make inflation a big issue in the next session of India’s famously fractious parliament, which opens on Monday.

The central bank has to make “whatever adjustments necessary” because plus 10 percent inflation is “not acceptable”, said senior government economic planner Montek Singh Ahluwalia.

Published in The Express Tribune, July 26^th, 2010.