Thursday 14 February 2008

India Has to Bring Inflation Down Further....

India's central bank Deputy Governor Rakesh Mohan said the country's inflation needs to be brought down further after the measure accelerated unexpectedly to the highest in more than five months.

Slower inflation will help keep interest rates low, Mohan said today in New Delhi. The rate is still high by global standards, the central bank official said. India's inflation accelerated to 4.11 percent in the week ended Jan. 26 from a year earlier, the government said Feb. 8.

``The RBI's objective has been to provide appropriate liquidity and keep inflation low,'' Mohan said. India can sustain high growth in the coming years by maintaining high savings and investments.

Governor Yaga Venugopal Reddy refrained from reducing interest rates at the Reserve Bank's last monetary policy meeting on Jan. 29 on concern rising oil and food prices will stoke inflation. Wholesale prices don't reflect last year's 57 percent increase in crude oil costs as retail fuel prices haven't been increased since June 2006.

While India is the most stable nation in terms of macro- economic policy, it faces a challenge in managing high credit growth, Mohan said.

The recent cuts in lending rates by banks are in line with the policy of the Reserve Bank of India, Mohan said. The economic and financial environment hasn't changed since the bank announced its monetary policy at the end of January, he said.

Rate Cuts

State Bank of India, the nation's biggest by assets, cut its benchmark prime lending rate by 25 basis points to 12.5 percent on Feb. 11. A basis point is 0.01 percentage point.

Housing Development Finance Corp., the Indian mortgage lender partly owned by Citigroup Inc., and banks such as Canara Bank and Allahabad Bank have also cut rates.

Finance Minister Palaniappan Chidambaram last month asked banks to lower rates to revive slowing loan growth and increase investment in Asia's third-biggest economy.

Chidambaram last week asked state-run banks to boost loans for the purchase of homes and consumer goods, which he said were key to economic growth.

Loan growth has eased in past months as consumers bought fewer automobiles and washing machines because of high interest rates and delayed home purchases as prices rose. Lending grew 22.6 percent in the 12 months through Jan. 25, less than the 29.8 percent expansion a year earlier, Bloomberg data shows.

The central bank has raised rates nine times since October 2004 to make loans more expensive.

Higher borrowing costs are prompting consumers to forego purchases. Bajaj Auto Ltd., India's second-largest motorcycle maker, posted a 16 percent drop in sales in January, its 12th straight month of declines.

The government on Feb. 7 said India's economy may expand 8.7 percent in the 12 months to March 31, the weakest pace in three years. Growth was 9.6 percent in the last financial year.