RBI takes measures to control inflation

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Indian bonds were little changed after a government report showed inflation accelerated for a seventh week in eight. The rate of wholesale price inflation was 4.75% in the week ended Oct 29. Economists expected the figure to be at 4.5%. The inflation rate was 4.49% the previous week. The yield on the 7.37% bond due 2014 was 6.98% which was not changed much in spite of the report.

India's inflation rate accelerated to 4.75% in the week ended Oct 29 from 4.49% in the previous week as the cost of fruit and vegetables rose. The wholesale price index rose 0.3% to 198.3 from 197.7 in the previous week.

The Reserve Bank of India (RBI) on Oct 25 announced a quarter- point increase in the key reverse repurchase rate at which it borrows overnight to 5.25%, the third in a year, to keep inflation within its forecast of between 5% and 5.5% by March 31. It predicted that persistent high oil prices will force the government to raise fuel costs, pushing inflation higher. For the week ended Sept. 3, the government raised the inflation rate to 3.64% from 3.16%. The government sometimes adjusts two-month-old inflation figures because of a lag in prices.

Governor YV Reddy has stated that India's inflation rate is within the expectations of the central bank which expects the rate to be between 5% and 5.5% by year-end.

The central bank lent money to banks at its daily repurchase auction, when it buys securities from lenders for a short period, temporarily injecting funds. The bank added Rs 2440 crore to the banking system. A mismatch between demand and supply of money with banks came about because the estimation of liquidity wasn't advanced enough. Frictional liquidity issue arises because in a system, in a fragmented market, the liquidity assessment by various players is not advanced yet.

The central bank will expedite the introduction of a second repurchase auction during the day for better liquidity management, he said.

On the other hand, finance minister P Chidambaram has announced that India's banks will need to raise Rs 60,000 crore ($13 billion) of capital in the next five years to meet expanding demand for credit and fuel economic growth. The nation's banks should boost lending to finance at least 50% of gross domestic product, from 35%.