Inflation worry may weigh heavy on rates

With some concern over the impact of continued high food prices on inflation which is back in the positive zone, a view is emerging in government that it might be time to slowly prepare the ground for changes in interest rates even as a hike is ruled out in the near future

India is not yet out of the woods:

While the government sees the economic recovery as work-in-progress and PM Manmohan Singh stressing India is not yet out of the woods, it is also being felt that expectations needed to be managed to ensure markets did not read policy signals incorrectly. The monetary policy was subject to constant review.

Impending interest rate changes:

Official sources saw RBI governor D Subbarao’s references to food-driven inflation as an obvious point even though the central bank was unlikely to openly indicate impending rate changes. The government and RBI were totally in sync over the need to nurture growth and this would mean interest rates were not likely to be revised soon.

RBI warning that “incipient inflationary pressures” — double digit consumer price inflation — may see India having to hike rates ahead of developed economies is seen in this light.

What is complicating matters?

What is complicating matters is the patchy monsoon, the effects of which on agricultural production are being compounded by late and unseasonal rain. Food prices are likely to be impacted and there is only so much that can be done by way of imports or release of stocks. At a banking seminar in Istanbul this week, Subbarao said, “Imports are not an easy solution given the requirements.”

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