India must tread careful path between growth, inflation fight

India must balance any measures it uses to control rising prices with any risks they pose to economic growth in the wake of the European debt crisis, Finance Minister Pranab Mukherjee indicated.

Inflation in India "is a matter of concern," Mukherjee said in an interview in Washington yesterday.

"I do hope that the steps we've taken both on the demand side and supply side will have a moderating influence," he said.

India's benchmark wholesale-price inflation unexpectedly accelerated 10.16 per cent in May from a year earlier, near the fastest pace in 17 months, government data showed.

The Reserve Bank of India said it would raise interest rates in a "calibrated" way given the cash squeeze in the economy and the threat posed by Europe's crisis, Governor Duvvuri Subbarao said June 18.

"It is a matter of time" before the central bank increased rates, said Shubhada Rao, chief economist at Mumbai's Yes Bank.

"The central bank is waiting for normalcy in the liquidity situation before raising rates."

Cash crunch

Indian lenders are short of cash after telecommunication companies including Bharti Airtel paid $14.6 billion in licence fees for wireless phone services and businesses withdrew money for taxes.

The next monetary policy announcement was scheduled for July 27.

The Reserve Bank has increased rates twice since mid-March in a bid to control prices.

Overnight interbank rates advanced to 5.3 per cent in Mumbai yesterday, higher than the repurchase rate of 5.25 per cent at which lenders borrow from the central bank.

"We shall have to strike a balance between these two situations," Mukherjee said, referring to economic growth and the acceleration in prices.

"We are watching the situation," he said. Commenting on any interest rate change would be "premature" the minister said.

India's inflation may slow to about five per cent by March, the finance minister said this week.

The country's $1.2 trillion economy expanded 8.6 per cent in the three months through March from a year earlier, the fastest pace after China and Brazil.

The nation's growth rate may reach "8.5 per cent plus" this year and nine per cent next year, Mukherjee said yesterday.

Expansion in manufacturing and services had "contributed substantially to the higher growth".