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High food prices may raise inflationary worries: RBI
Published on 6 Dec. 2009 11:59 PM IST
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: A persistent rise in India’s food prices may raise broader inflationary expectations and the central bank is looking to strike a balance between supporting growth and taming inflationary worries, a central banker said. Subir Gokarn, deputy governor of the Reserve Bank of India (RBI), also said on Saturday the exit from easy monetary policy is a “graded” process and economic growth alone will not determine its pace. According to Reuters, the data on Thursday showed food prices rose 17.47% in the 12 months to Nov. 21, after the weakest monsoon since 1972 followed by floods in parts of the country hurt farm output. While food inflation is politically sensitive, it is viewed as largely beyond the scope of interest rate policy. “Persistently ... rising food prices may spill over into inflationary expectations. So, we cannot ignore that linkage,” Gokarn told reporters on the sidelines of an industry conference. “And therefore, it is a factor that we will have to take into account”, he added. On Monday, India reported economic growth of 7.9% in the quarter through September, its fastest rate in 18 months, beating expectations and adding pressure on the central bank to bring forward a rate rise to moderate mounting inflation. Monetary tightening: Indian federal bond yields in the week to Dec. 4 rose 29 basis points on fears of monetary tightening. The 10-year benchmark bond yield closed on Friday at 7.48%, after touching 7.49% in late trade, its highest since Sept. 4 and just one basis point shy of a 13-month high. But Gokarn downplayed market expectations of monetary tightening. “The growth number is one input to do that. It is not the only one. There are other factors that we will consider.” The RBI cut its key lending rate by 425 basis points between October 2008 and April to revive growth in a slowing economy, hit harder than expected by the global downturn. At its October policy review, it left its key rates steady, but began scaling back its monetary stimulus by removing some of the liquidity support measures implemented to help India weather the downturn. “That was a signal that circumstances had changed and the exclusive focus on growth had now shifted to a more balanced approach between growth and inflation,” he said before adding “When you talk of exit, you should see it as a graded process... Now how fast that process moves forward depends on conditions that we can see.” Rising capital inflows is seen as one of the factors that is acting as a restraint on the central bank’s policy. Foreign investors have pumped about $16 billion into Indian equity markets this year after having been net sellers of $12 billion last year. The RBI has said there is a risk that if it raised interest rates ahead of other central banks, it could attract more inflows and complicate policymaking. “Yes, they (capital inflows) may as they did in an earlier period ... impose some kind of pressures, counter-pressures on liquidity management,” Gokarn said. The central bank may revise upwards its growth forecast of 6 percent with an upward bias for 2009/10 at its January policy review, he said, adding a sustained recovery would boost credit off-take as well.

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