India may need to raise interest rates before other countries do so, as inflationary pressures are building up, Reserve Bank of India (RBI) governor D Subbarao said on Tuesday.
The central bank will however, start exiting the monetary expansion only when it is sure that the economic recovery is ?secure?, Subbarao said at a seminar organised by Indian Council for Research in International Economic Relations. ?The question of exit will fall upon us much earlier than other countries,? Subbarao said, while stressing that any exit plan will have to be coordinated with actions of global central banks.
The wholesale price index (WPI) based inflation has already touched 5.2% between April 1 and August-end, even though the year-on-year inflation remains negative, the governor pointed out, ostensibly trying to prepare the market for future unwinding.
The year-on-year WPI inflation stood at -0.12% for the week ended August 29, up from -0.21 in the previous week. ?The WPI inflation will be 5.2% plus (by March 2010). CPI (consumer price index) inflation, even being in double digits, is going up,? he said. The RBI had raised its inflation forecast for 2009-10 to 5% from 4%.
However, Subbarao added, ?In taking a call, especially on monetary policy on exiting, we will not exit until we are sure that recovery is secure, and soon thereafter, we will start unwiding accommodation.? The RBI will study data on inflation, capital flows, industrial of industrial production growth, credit growth and various other indicators to ascertain whether the recovery is secure, he said.
Subbarao also added that the challenge for the government and RBI will be to reverse monetary expansion and drive growth. ?India is not a demand-constrained economy. It is a supply constrained economy,? he said.
The governor also said there is an agreement among the G-20 countries on not only co-coordinating exit strategies but also on ?talking about? such policies. RBI will also need to be watchful in raising the interest rates that could lead to a flood of capital flows into India.
?There is a whole lot of liquidity stocking up in the world. If we raise interest rates earlier than others, then we will have capital flows coming in,? Subbarao said. ?We do want capital flows. We do not want a flood of capital flows. We want measured capital flows,? he stressed. Foreign institutional investors (FIIs) pumped in $8.87 billion in the Indian stocks so far in 2009, as per the Securities and Exchange Board of India data. They sold more than $13 billion in 2008. In 2007, FIIs were net buyers of $17.4 billion in the equities market.