India's Central Bank May Need to Rise Interest Rates

India's central bank should raise interest rates as inflation at a 16-year high hurts the government's electoral prospects before a vote due by May, according to the finance ministry's top economist., Bloomberg 8/26/2008 9:38:35 AM

India's government is relying on the central bank to tame prices after Prime Minister Manmohan Singh's cabinet last week decided to pay more to civil servants than was recommended by a wages panel. Inflation jumped to 12.44 percent this month, making life harder for the 500 million people in India who survive on less than $2 a day.

The Reserve Bank of India last month raised its inflation forecast for the year to March 31 to 7 percent from a previous target of between 5 percent and 5.5 percent, even after increasing its benchmark interest rate three times since June.

The central bank's key repurchase rate will rise to between 9.25 percent and 9.5 percent by the end of October from 9 percent, according to eight of 12 economists surveyed by Bloomberg after the last monetary policy announcement on July 29.

Inflation may accelerate further after Singh's cabinet approved an average salary rise of 21 percent for 5 million government employees, backdated to January 2006. The 157 billion rupee ($3.6 billion) cost of the pay increase in the financial year to March 2009 is almost twice the 79.95 billion rupees recommended by a panel which reviews wages for civil servants every 10 years or so.

Singh's government, which came to power four years ago with a pledge to help the poor, has lost ground in nine of 11 state polls since January 2007.

Asia's third-largest economy is expected to expand 7.7 percent in the 12 months to March, compared with an estimated 9 percent a year earlier, according to last week's report from the prime minister's advisory council. That would be the slowest pace of expansion in four years.