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Rajan, Chidambaram disagree on inflation

rbi_rajanIndian central bank Governor Raghuram Rajan warned that inflation remained the biggest threat to growth, diverging from the nation’s finance chief, who highlighted diminishing price pressures.

A developing economy like India that is seeking higher growth rates can tolerate higher inflation than advanced nations, Finance Minister Palaniappan Chidambaram said in an interview in Sydney, where he was attending the Group of 20 meetings with Rajan. Chidambaram, who declined to say what level of consumer price gains would be appropriate, lauded a drop in wholesale inflation to 5.05 percent as “a big achievement.”

“Even at this point our challenge really is to bring inflation down, because inflation is hurting growth,” Rajan told Bloomberg News in a separate interview in Sydney yesterday. “As inflation comes down, we will get much more possibilities for growth.”

Rajan last month boosted borrowing costs for the third time since becoming head of the Reserve Bank of India in September, joining nations from Turkey to Brazil in raising interest rates as the U.S. Federal Reserve reduced monetary stimulus. That has hampered Chidambaram’s effort to engineer a faster recovery as opinion polls show his ruling Congress party losing a national election due by May.

A central bank panel last month proposed reducing CPI to 8 percent within one year and 6 percent by 2016, and that the RBI should then adopt a 4 percent target with a band of plus or minus two percentage points. Consumer price gains slowed to 8.79 percent in January from 9.87 percent in December, the fastest among 18 Asia-Pacific economies tracked by Bloomberg, while wholesale price inflation fell to a seven-month low.

“It is for people to say,” Chidambaram said when asked to comment on the proposed retail inflation target. “We have moderated it.”

The rupee, down 0.5 percent this year, was little changed at 62.1350 per dollar at 9:21 a.m. in Mumbai today. The S&P BSE Sensex index lost 0.1 percent. The yield on the 10-year government bond due November 2023 rose to 8.81 percent from 8.80 percent on Feb. 21.

The Group of 20 nations said monetary policy should remain accommodative for now in many advanced economies and pledged a coordinated push to boost growth by more than $2 trillion over the next five years. Rajan, who last month warned of a breakdown in international monetary policy cooperation, said there was “widespread agreement” that advanced economies should worry about spillover effects of central bank actions.

In a bid to woo voters and boost consumption, Chidambaram in his Feb. 17 budget cut excise tax rates on sport-utility vehicles, small cars and motorcycles until June 30 while urging lawmakers to pass a goods and services tax. He also reduced the excise duty for a range of consumer goods, including washing machines, DVD players and microwave ovens.

Wholesale price inflation slowed last month by more than economists estimated to 5.05 percent, compared with 6.16 percent in December, the Commerce Ministry said.

“Clearly for a developing country that is aiming for high growth, you cannot expect the level of inflation that is acceptable in advanced economies,” Chidambaram told Bloomberg News in an interview in Sydney. “In advanced economies the tolerance level is no more than 1 or 2 percent.”

Rajan unexpectedly raised the policy rate to 8 percent from 7.75 percent on Jan. 28, saying that consumer-price inflation posed the greatest risk to the value of the rupee. The currency, down about 12 percent against the dollar in the past year, has been the world’s best performer after hitting an all-time low in August following measures to boost reserves and reduce the current-account deficit.

The RBI must strike a balance between price stability and growth, while adding that the elected government must determine the pace of growth and policies that help the economy expand, Chidambaram said on Feb. 17. The budget deficit is forecast to narrow to a seven-year low of 4.1 percent of gross domestic product by March 31, 2015.

Asia’s third-biggest economy will grow 6 percent in the fiscal year starting April 1 and 7 percent the next “if we adhere to the path that has been chalked out” in the budget speech, Chidambaram said.

If inflation slows, the economy can grow between 5 percent and 6 percent in the year starting April 1, the RBI predicts. India’s economy will expand 4.9 percent in the 12 months through March 31, faster than the decade-low expansion of 4.5 percent last year, the Statistics Ministry said this month.

India’s fiscal position remains weak and a cut in spending to meet the budget gap estimate this year will probably hurt growth, Moody’s Investors Service said on Feb. 18. Standard & Poor’s warned in November India could face a downgrade if the vote fails to produce a government capable of reviving growth.

No party will get a majority to form the government after the elections, according to opinion polls that show the incumbent Congress party losing power. The main opposition Bharatiya Janata Party would win 217 of 543 seats up for grabs in the lower house of parliament, according to a survey released on Feb. 22 by ABP News television channel and Nielsen.

The Congress-led government’s second term in office has been marred by graft scandals, sluggish economic growth and Asia’s fastest consumer-price inflation, which averaged about 10 percent in the past year. Singh said last month his government could have done a better job at controlling inflation after the Congress was trounced in state elections.-Bloomberg