Chidambaram - Easing inflation may cap interest rates

Finance Minister P.Chidambaram said on 27 June that central bank policy tightening and currency strength had helped to moderate inflation and more rate rises may not be needed if the trend continues.

“So far central bank actions have moderated inflation. The rupee rise has also helped moderate inflation to some extent,” Chidambaram told reporters on the sidelines of a conference in London.

“If inflation is contained at current levels and shows a decline, there is no reason why interest rates should go up.”

Last week, data showed India’s wholesale inflation fell to its lowest level in 14 months at 4.28% in the 12 months to 9 June. The signs of slowing price growth came finally after five interest rate rises in the past year to 7.75%.

The central bank has also largely kept out of the rupee’s way as the currency has surged to nine-year highs versus the dollar, rising about 9% so far this year.
India’s economy, the third largest in Asia, grew 9.4% in the fiscal year ending March, its highest rate in 18 years and second only to China among major economies.

Chidambaram said the intention for this year was to keep inflation at 4.0 to 4.5%. He earlier told the conference that inflation remained a concern for the economy but policies aimed to tackle this issue should not dampen growth.

“We have to strike a balance between growth and inflation. The politically tolerant level of inflation in India is 4-4.5% and we are aiming to keep it at that level,” he said, noting that factors such as oil prices would be key.

“But we will be alert and take fiscal as well as monetary steps (to curb inflation)”.
Chidambaram said it was hoped gross domestic product growth would be “close to 9%” in the current fiscal year, with an annual growth rate of 10% growth achievable by 2010.

He acknowledged that rupee appreciation was a headache for Indian exporters, but he said the rise was due to huge capital inflows into the country and no immediate steps were planned to curb the currency’s strength.

“We don’t believe in imposing capital controls on inflows. We will keep an eye on the rupee but our policy is a well regulated market determining the exchange rate,” he said. “The rupee will find its level, if it hurts any sector unduly, we will help that sector in other ways.”

Chidambaram forecast that foreign direct investment would exceed the $16.1 billion received in the 2006/2007 fiscal year.

One of the sectors that has experienced booming price growth has been real estate and most major Indian cities have seen property prices double in the past two years.

Foreign property funds have been flocking into India ever since rules on inward investment in the construction sector were relaxed.

Many analysts believe a property price correction of 10-40% is due in the short term. The last time a property bubble burst in India, prices fell as much afive interest rate r ises in the past year to 7.75%.