The Great Debate (India)

from MacroScope:

India’s central bank battles alone in inflation struggle

INDIA-ECONOMY/RATES What more does India's central bank have to do? Last week data showed March inflation rising to almost 9 percent on an annual basis. More importantly, core inflation is above 7 percent for the first time in 3 years meaning demand-side pressures are rising fast. And that'sĀ despite theĀ Reserve Bank of India raising interest rates eight times since last March.

The inflation data comes just after a quarterly HSBC report based on purchasing managers indexes showed that inflation in India seemed impervious to monetary policy tightening.

The truth, is the inflation-fighting central bank has little backup from the government which remains stubbornly in spending mode. Its foot-dragging on reform and foreign investment contributes towards keeping food price inflation high. This year's fiscal deficit target is 4.8 percent of GDP and even this
is seen as optimistic.

"What India really needs is to have domestic demand slowing down quite rapidly but the government is not prepared to risk that,"says Claire Dissaux, investment strategist at Millenium Global in London.

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