India Should Keep ‘Accommodative’ Rate Policy, Singh Aide Says

By Kartik Goyal and Cherian Thomas

Oct. 21 (Bloomberg) -- India should maintain an “accommodative” monetary policy until the economy recovers and inflation flares up, a top aide to the prime minister said, highlighting political pressures on the central bank to keep interest rates unchanged next week.

“The stance of monetary policy will have to change from its highly accommodative position,” said Chakravarthy Rangarajan, economic adviser to Prime Minister Manmohan Singh. “But that has to wait and that will depend on the growth performance of the economy and also inflationary pressures.”

Governor Duvvuri Subbarao said earlier this month that there is consensus within the Reserve Bank of India on the need to boost policy rates, while there is no agreement on the timing of such a move. The central bank’s next monetary policy statement is due to be released on Oct. 27 in Mumbai.

“Given the present signs of inflationary pressures, we have to act earlier than the U.S. and European economies” on interest rates, Rangarajan said today.

The Reserve Bank has kept borrowing costs at record lows after cutting its repurchase rate six times between October 2008 and April 2009 to help shield the economy from the global recession. The central bank left its key rates unchanged in July’s policy statement.

“In the short-term, managing inflationary risks, particularly food-price inflation, is the biggest challenge to be faced by our policy makers,” Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said at a news conference in New Delhi today.

Faster Inflation

The Economic Advisory Council forecast inflation to accelerate to around 6 percent by March 2010, more than the central bank’s 5 percent year-end estimate. The council also said India’s economy may expand 6.5 percent in the year through March, slower than the 8.7 percent average growth of the previous four years.

India’s economic growth is likely to slow in the current fiscal year due to the impact of the global recession and a reduction in farm output due to the weakest rains in almost four decades, Rangarajan said.

Total food grain production is likely to decline by 11 million tons in the current year to 223 million tons, compared with 234 million tons last year, the council said in a report. That will put pressure on food supplies, it said.

Rangarajan said stimulus measures introduced to protect India’s $1.2 trillion economy from the impact of the global recession must continue until the end of March 2010.

Interest-rate cuts and government tax reductions have together provided a stimulus worth more than 12 percent of India’s gross domestic product, according to central bank estimates.

“The stance of monetary policy will have to be calibrated taking into account growth prospects and the inflationary pressures,” Rangarajan said.

Overseas inflows into stocks may rise to $24.1 billion in the year to March and India may get foreign direct investment worth $36.9 billion. The council expects export orders worth $188.9 billion in the current year.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Cherian Thomas in New Delhi at Cthomas1@bloomberg.net