Sustained high food inflation warrants monetary steps - RBI

The Reserve Bank of India (RBI) chief Duvvuri Subbarao on Tuesday said monetary steps may be warranted to curb inflation expectations in face of sustained high food inflation, flagging the need to revisit politically sensitive subsidy schemes in agriculture.

RBI Governor also said that the government's food for work programme and proposed food subsidy bill will further raise fiscal deficit and inflationary pressures.

Food inflation has been stubbornly high over the last few years in India, inspite of record foodgrain production and robust buffer stocks.

The RBI has already raised rates 13 times since early March 2010 to clamp down on stubborn inflation, largely driven by high food prices.

"The direct role of monetary policy in combating food price pressures is limited, but in the face of sustained high food inflation, monetary action may still be warranted to anchor inflation expectations," Subbarao said in a speech at a conference in the south-eastern city of Hyderabad.

The comments, hawkish as they seem, may not warrant a change in RBI's stance which has signalled a likely pause in rate hikes in the December policy and may be extend it, if inflation falls in line with the RBI's projected trajectory.

The central bank, in a bid to ease tight banking system liquidity, will buyback bands upto 100 billion rupees ($1.9 billion) on Thursday.

Subbarao said large increases in the minimum support prices on food grains by the government to farmers was one of the reasons driving food inflation.

"There is a case for revisiting subsidy regime for a number of reasons, including the pressure it exerts on food inflation."

His criticism comes on the first day of a parliamentary session in which the government will propose doubling food subsidies to about $24 billion in an effort to bolster its support among millions of poor Indians ahead of state elections.

Agricultural subsidies are a politically volatile issue as farmers constitute a large votebank for political parties.

The central bank chief also said the supply chain of farm products is a major source of price pressures and the cross-country experience on the benefits of multi-brand foreign direct investment on inflation is "ambiguous".

India's cabinet may decide to allow chains such as the world's largest retailer Wal-Mart Stores Inc (WMT) to operate in the country with a majority stake under strict local sourcing rules, a senior government source told Reuters.

A draft cabinet note suggesting so-called multi-brand retail foreign firms could hold up to 51 percent ownership has already been reviewed, a senior government source said on Friday.

Subbarao also said that the government's proposed food subsidy bill is another major potential source of inflationary pressure.

"The higher food subsidy burden on the budget will raise the fiscal deficit, exacerbating macro level inflationary pressures."

Estimates suggest that 68 per cent of the country's 1.2 billion population will get a legal entitlement for food grains after the bill is enacted, which will significantly raise annual grain procurement demand even as the available marketed surplus would not increase in the same proportion.

The governor made it clear "a lasting solution to food price pressures lies in a supply response" from the government.

Data released last week showed India's food price index rose 10.63 percent and the fuel price index climbed 15.49 percent in the year to Nov. 5.

Food Inflation slips to 9.32% for week ended Oct 1

India's food inflation slipped marginally to 9.32 percent for the week ended October 1 as compared to 9.41 percent in the previous week, official data showed Thrusday.

Earlier Finance Minister Pranab Mukherjee had said that acceleration in the prices of food and other essential commodities remained a matter of concern and the government was constantly in touch with the Reserve Bank of India to bring down inflation to a comfortable level.

"Inflation is definitely a matter of concern. We shall have to see how to bring it down to a moderate level. I am constantly in touch with the RBI and other experts in this area," Mukherjee had said.

Inflation has remained stubbornly high near double-digit since January 2010. The headline inflation based on the wholesale price index was recorded at 9.78 percent in August, according to the latest official data.

The stubbornly high inflation might prompt the RBI to hike policy rates again. The central bank has hiked key policy rates 12th time since January 2010.

Central Bank to hike rates again to check inflation

The Reserve Bank is expected to hike key interest rates by 25 basis points Friday to tame the near double-digit inflation, a move that may eventually make auto, home and corporate loans more expensive.

With inflation remaining stubbornly high at 9.78 percent for August, bankers and economists expect the central bank to continue with hawkish monetary policy and hike rates again at the mid-quarterly credit policy review on Friday.

RBI has raised interest rates 11 times since March 2010 to check the rate of price rise, but inflation has remained much above the central bank's comfort level of 5-6 percent.

"The current rate of inflation would put pressure on RBI to further tighten monetary policy. There could be a hike of 25 basis points in key rates by RBI," Oriental Bank of Commerce Executive Director S C Sinha said.

Expressing similar opinion, Standard Chartered senior economist Anubhuti Sahay said, "Moderation in growth is not yet broad-based. As inflation control remain the central bank's major agenda, we think it is likely to go in for another hike of 25 basis points in key-policy rates."

However, while raising the rates, RBI will have to take into account its impact on economic as well as industrial growth, which slipped to 21-month low of 3.3 percent in July. Economic growth in the April-June quarter stood at 7.7 percent, lowest in six quarters.

In view of the sliding growth, industry chambers have urged RBI to refrain from hiking interest rates but the central bank, economists feel, will give precedence to inflation control before growth in its policy review.

Earlier this week, State Bank of India Chairman Pratip Chaudhuri said, "There could be (rate hike by RBI). Inflation is still not under control."

RBI is chasing inflation and till such time it is contained, the central bank will continue with tight monetary policy stance, Chaudhuri said.

Economists further said that the weakening of the rupee against the US dollar was bad news for policy makers grappling with inflation.

"The recent depreciation of the rupee relative to the US dollar would exert pressure on the prices of imported items... Accordingly, we expect the RBI to persist with monetary tightening and hike the repo rate by 25 basis points in the upcoming policy review, despite the sluggish industrial growth," ICRA economist Aditi Nayar said.

India August Inflation Accelerates

India's inflation rose at its fastest pace in 13 months in August, reinforcing expectations the central bank will continue with its monetary tightening when it meets Friday.

The wholesale price index rose 9.78% in August from a year earlier, quicker than July's 9.22% increase. The reading was a bit above the median estimate for a 9.70% rise in a poll of 16 economists.

It was the ninth consecutive month that inflation has stayed above 9%, driven by intense price pressures in food articles that have steadily spread to a wider basket of commodities.

"It is a time of stress, not only in India but all over the world, and we shall have to maintain our nerve," Finance Minister Pranab Mukherjee said after the data were released.

The government slightly raised June's inflation reading to 9.51% from a provisional 9.44%, but the revision was small compared with those of previous months and helped calm market worries that provisional readings might be grossly understating inflationary pressures.

The data underscore how strongly price pressures have become entrenched in India's economy, likely prompting the Reserve Bank of India to raise its lending rate again Friday.

"While inflation is still at elevated levels, there is no conclusive data to prove that the downtrend in growth is alarming," said D.K. Joshi, chief economist at ratings firm Crisil, suggesting inflationary concerns still outweigh worries of slowing growth. He expects a 0.25-percentage-point rate increase at Friday's policy review.

Chief Economic Adviser Kaushik Basu said the RBI has a complex task at hand to bring down inflation amid signs of faltering growth. "The RBI will have to balance out these two--controlling inflation and not dampening growth too much."

Considering that the inflation rate has continued to rise despite 11 interest-rate increases in the past 18 months, some policymakers are questioning the effectiveness of the central bank's approach.

Economic Affairs Secretary R. Gopalan said earlier Friday the rate increases have had only a limited impact on inflation, which is mostly driven by supply constraints in the economy.

"While monetary tightening has been able to anchor inflationary expectations up to a point, it has had limited success in lowering inflation to acceptable levels," Mr. Gopalan said.

Still, economists say the RBI has little choice but to raise its policy interest rate by another 0.25 percentage point this week.

RBI: Banks need to do away with pre-payment charges for floating home loans

Banking Ombudsmen have suggested that lenders need to compensate customers for mental harassment they suffer due to deficient services.

At their annual conference held at the Reserve Bank of India (RBI), they also suggested that banks need not impose any charges for pre-paying loans taken under floating rates by customers.

RBI or the Indian Banks Association (IBA) would examine the issues pertaining to the monetary compensation for mental harassment suffered by bank customers, the Ombudsmen suggested yesterday.

Deliberation in the conference suggested that banks may also offer long-term fixed rate housing loans to customers.

They also said lenders may address their asset liability mismatch (ALM) issues by recourse to the Interest Rate Swaps (IRS) market.

Floating rate loans pass on the interest rate risk from banks, which are much better placed to manage it, to borrowers and, thus, banks only substitute interest rate risk with potential credit risk, the Ombudsmen noted.

The banks will, however, be free to recover or charge appropriate pre-payment penalties in the case of fixed rate  loans, the 10 action points to improve customer service said.

In his his inaugural remarks RBI Governor D Subbarao said "Often, prevention was better than cure. In customer service area too, rendering good customer service was like 'prevention' and was better than the 'cure' which was the various grievances redressal mechanisms."

He also asked do all banks have customer grievances redressal officers and noted that at that level are the most important terms and conditions explained to customers before they signed the documents.

Meanwhile, Minister of State for Finance Namo Narain Meena in a written response in the Rajya Sabha Tuesday said the government in May 2010, advised PSBs, IBA and National Housing Bank that no pre-payment charges may be levied by the lending institutions when the loan amount is paid by borrowers out of their own funds.

If any pre-payment charges are to be imposed on housing loans, the same need to be reasonable and transparent and not out of line with the average cost of providing these services, Meena said.

The PSBs have reported that by and large they do not levy any pre-payment charges when the amount is paid by the borrowers from their own sources, the minister said.

India's growth may temper to 7%, rate hikes to go on: Deloitte

The Reserve Bank of India is expected to continue with the rate hikes until inflation comes down to around 6 percent, while economic growth could temper to as low as 7 percent, according to a report by leading consulting firm Deloitte.

"Inflation is unlikely to subside in the near term, and the Reserve Bank of India will probably continue raising interest rates until inflation stabilizes around 6 percent," said the Deloitte global economic outlook third-quarter report released Thursday.

"Costlier credit could also lead to a drop in investment activity through the year. Consequently, GDP growth for the current fiscal year could be as low as 7 percent," it added.

Inflation, based on whole sale prices, was recorded at 9.22 percent in July, while latest data released showed that food inflation had risen over double digits, at 10.05 percent for the week ended Aug 20.

The report added that unless India's fiscal situation improved, it is unlikely that its economic challenges will be alleviated in the coming year.

The first quarter of the current fiscal saw gross domestic product (GDP) increasing the slowest in six quarters at 7.7 percent. The government has targeted 9 percent growth  in 2011-12.

The report also said that the department of industry policy, under the commerce and industry ministry, had prepared a draft proposal for allowing 51 percent foreign direct investment (FDI) in multi-brand retail.

FDI in the retail sector is likely to improve distribution networks and supply chain efficiencies and over time help reduce food inflation, the consultancy said.

High inflation coupled with global economic uncertainty are some of the key challenges faced by the Indian economy in the current fiscal.

"There are concerns on the fallout of global uncertainty on the domestic economy and the success of India's'growth story," said Anis Chakravarty, director Deloitte Haskins and Sells.

"The central bank stressed that its primary concern is price stability and that it is willing to sacrifice growth in order to rein in inflation. Couple this with India's fiscal and current account deficit quandaries and the country's economic problems seem to magnify," he added.

The government's oil subsidy bill alone is likely to the tune of Rs.1.2 trillion (Rs.120,000 crore) this fiscal, while it is expected to suffer a loss in customs and excise duties worth Rs.490 billion (Rs.49,000 crore).

"To compound matters, the rise in the price of diesel, kerosene and cooking gas is likely to stoke inflation," said the Deloitte report.

RBI may hike rates as food inflation surges to 10.05%

After a gap of over five months, food inflation entered the double-digit zone at 10.05 per cent for the week ended August 20, with Finance Minister Pranab Mukherjee describing the trend as "disturbing" and experts saying RBI may go in for another rate hike.

The weekly food inflation, measured by Wholesale Price Index (WPI), went up from 9.80 per cent on account of expensive onion, vegetables, fruits and protein-based items.

The last time food inflation crossed 10 per cent was in the week ended March 12.

"Food inflation has gone up... This is really disturbing. We shall have to ensure and remove the supply constraints on food items," Mukherjee told reporters here.

As per the official data released today, prices of onion soared by 57.01 per cent year-on-year and potato rose by 13.31 per cent during the week under review.

Fruits became dearer by 21.58 per cent and vegetables overall by 15.78 on an annual basis.

Prices of protein rich items, egg, meat and fish were up 12.62 per cent, while milk and cereals became dearer by 9.22 per cent and 4.64 per cent respectively.

Attributing the jump in food inflation to seasonal factors, experts opined it could again force the Reserve Bank to hike interest rate during its mid-quarter monetary policy review scheduled on September 16.

"With headline inflation remaining well above 9 per cent, we expect RBI to raise key policy rates by 25 basis points at its next mid-quarterly review," Crisil chief economist D K Joshi said.

Food items constitutes about 14 per cent to the WPI.