Indian Prices Fall as Subbarao Looks Beyond Inflation

Aug. 20 (Bloomberg) -- India’s benchmark wholesale price index extended its longest decline in three decades as central bank Governor Duvvuri Subbarao says an inflation-targeting policy isn’t enough to maintain financial and economic stability.

Wholesale prices fell 1.53 percent in the week to Aug. 8 from a year earlier, the commerce ministry said in New Delhi today. That was more than the median forecast of a 1.49 percent decline in a Bloomberg News survey of 18 economists.

Subbarao is concerned that inflation may gather speed, as evidenced by upward revisions the commerce ministry has been making to the wholesale price index in recent months. The governor told a forum in the southern Indian city of Hyderabad last week that the global financial crisis has shown an exclusive focus by central banks on inflation targeting “doesn’t work.”

“The central bank can’t detach itself from its stated objective of maintaining price stability and at the same time will have to address concerns over growth and orderly financial markets,” said D. H. Pai Panandiker, president of the RPG Foundation, an economic policy group in New Delhi.

Subbarao slashed the Reserve Bank of India’s key interest rates six times between October 2008 and April 2009 to an unprecedented low. On July 28, he left the reverse repurchase rate unchanged at 3.25 percent and kept the repurchase rate at 4.75 percent and said the central bank may have to “reverse” its expansionary measures to subdue inflation.

Weak Monsoon

Bonds were little changed. The yield on the 7.02 percent note due August 2016 was unchanged at 7.10 percent as of 12:04 p.m. in Mumbai, according to the central bank’s trading system.

Gains in wholesale prices may exceed the central bank’s forecast of 5 percent by March next year as a weak monsoon threatens to reduce harvests and push up food prices. Inflation has slowed from a 16-year high of 12.91 percent in August 2008.

The India Meteorological Department on Aug. 10 lowered its monsoon forecast for a second time this season, saying showers between June and September will be 13 percent below average, compared with a 7 percent shortfall estimated in June.

Food costs, as reflected in the consumer-price indexes, are already high. India has four consumer-price gauges and uses the wholesale-price index as the benchmark because the other inflation measures don’t capture the aggregate price picture.

‘Complicates’ Policy

Consumer prices paid by farm workers jumped 11.52 percent in June from a year earlier after gaining 10.21 percent in May. Prices paid by rural workers rose 11.26 percent in June and those paid by industrial workers climbed 9.26 percent.

Subbarao says the discrepancies between these inflation measures “complicates” monetary policy. The governor claims borrowing by Prime Minister Manmohan Singh’s government to fund the widest budget deficit in 16 years also “impedes” the transmission of central bank policy.

Finance Minister Pranab Mukherjee on July 6 unveiled plans to borrow a record 4.51 trillion rupees ($93.3 billion) to fund a budget gap estimated at 6.8 percent of gross domestic product.

The central bank is worried that high government borrowings are “literally negating the interest-rate cuts of the past months,” said the RPG Foundation’s Panandiker.

In its most recent monetary policy statement released July 28, the central bank said its medium-term objective is an inflation rate of 3 percent.

Asset-Price Bubbles

Subbarao last week said inflation targeting can’t do much to provide protection against asset-price bubbles and doesn’t necessarily deliver financial or macroeconomic stability.

“The challenge thrown up by the crisis is what should be the mandate of the central bank,” he said. “If an exclusive focus on targeting of inflation has failed, how do we rejig that mandate?”

The Reserve Bank has done a “fairly decent job” in recent years to tailor its strategy according to an evolving economic environment, said Dharmakirti Joshi, an economist at Mumbai- based Crisil Ltd., the local unit of Standard & Poor’s.

“Though the central bank will have to remain focused on inflation, strict mechanical targeting is not feasible in a country like India,” Joshi said. “One reason for that is that the RBI is juggling a lot responsibilities, including managing government debt and ensuring financial markets stability.”