Anand Sharma signals opposition to rate hike
Trade minister Anand Sharma said on Tuesday that monetary policy may not be the right tool to fight high food inflation, signalling strong political opposition to a rate hike the Reserve Bank of India (RBI) is widely expected to vote for next week.
January 18, 2011 / 19:05 IST
Trade minister Anand Sharma said on Tuesday that monetary policy may not be the right tool to fight high food inflation, signalling strong political opposition to a rate hike the Reserve Bank of India (RBI) is widely expected to vote for next week.
The move highlights that while the government is increasingly worried about high prices of staple foods such as onions and lentils leading to wider inflationary pressures, it is unwilling to sacrifice economic growth of close to 9 percent that underpins its voter support.In a letter sent to Finance Minister Pranab Mukherjee and released to the media, Sharma also said that a selective restriction on credit may be needed to check inflationary pressures.The finance and other ministries often make clear which way they want a nominally independent central bank to move ahead of policy meetings, but market players said they did not expect the trade minister's intervention to change rate expectations.The RBI is widely expected to raise key rates by at least 25 basis points at its Jan. 25 review as it attempts to rein in inflation to its projected level of 5.5 percent by March.India battled double-digit food inflation through most of 2010, the highest rate of any major Asian economy. Spiralling food and fuel prices have damaged voter confidence in the government, causing a headache for the multi-party ruling coalition."The high inflation in primary articles, particularly vegetables, is more on account of supply-side constraints and monetary policy may not be the most suitable intervention to deal with the situation," Sharma said in the letter.Sharma's ministry has become the focus of debate on whether to open up India's retail sector to foreign investors, a reform that supporters say will help beef up supply chains and ease food inflation. But fears of mass job losses among smaller retailers make the issue a political minefield.Highlighting the political challenge facing the government, hundreds of opposition supporters protested against high food and fuel prices near India's parliament on Tuesday, forcing police to use water cannons to break up the crowd.'DESPERATE' RBIThe headline inflation rose an annual 8.43% in December on higher food prices, cementing expectations of a rate increase by the central bank next week.RBI governor Duvvuri Subbarao said on Monday the central bank was "desperate" to control inflation, though such sentiment may be tempered by industrial growth hitting an 18-month trough in November.But with signs that food inflation, which touched a 1-year-high in end-December, has fed through into broader price pressures, monetary intervention may be needed, even though it is regarded largely ineffective in addressing supply side problems.Policymakers appear to be resigned to elevated inflation levels, above the RBI comfort zone of 5.5%, given the supply side pressures on food items such as vegetables.Finance Secretary Ashok Chawla said last week headline inflation by end-March would be around 6.5%.In the January 25 policy review, the RBI will walk a tightrope of reining in high inflation without choking a projected 8.5% growth that has been the government's primary focus. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
