Thursday, January 6, 2011

India inflation and monetary policy

A just completed IMF mission to India has warned of the risk of higher inflation and the likelihood of further interest rate hikes. India is growing at a strong clip - a China-like 8.9% for the year to September - with little slack in the economy. While inflation has cooled from recent highs, it remains at an elevated 9.7% for the year to October 2010.

India entered the Global Financial Crisis from a position of near over-heating and already relatively tight monetary conditions. The benchmark interest rate was lowered from a pre-GFC level of 6% to 3.25% by mid 2009. From that low point, interest rates were raised 6 times during 2010, rising to 5.25%.

The Reserve Bank of India should be applauded for its actions thus far, but we agree with the IMF assertion that there is more work for them to do yet. Remember inflation and the containment thereof will be the key emerging market theme this year.