Lower crude prices to ease inflation firefight: Gokarn

The recent softening of fuel prices would make the fight against inflation by global monetary authorities easier, Reserve Bank of India (RBI) Deputy Governor Subir Gokarn said on Tuesday. “If this trend persists, it will provide substantial relief for global inflation management, particularly for large commodities importers,” he told a think tank conference in Washington. He pointed to the recent drop in US gasoline prices as a sign of the trend. India's ambassador to Washington, Meera Shankar, said at the conference that India welcomed actions by the US and other Western oil consumers to release oil from their strategic reserves, saying it was helping ease prices. Gokarn said a slowdown in growth due to RBI's policy tightening actions should also help ease inflation, which had been stubbornly high, in the nine per cent range. Earlier this month, India raised interest rates for the 10th time in just over a year, boosting the rate at which it lends to banks by 25 basis points to 7.5 per cent. RBI's baseline forecast anticipated India's annual growth rate slowing to around 8 per cent, Gokarn said. This compares to about 8.5 per cent for 2010-11. “From the inflation management perspective, this is not an entirely undesirable outcome,” he said. “If it results in a significant reduction in the inflation rate, it will represent a soft landing, which in turn opens up the opportunity for a reversal of the interest rate cycle,” he added. Nonetheless, Gokarn said, it was important to pay attention to evidence of household inflationary expectations that had risen with higher food prices. “Recent surveys have reinforced the perception that household expectations are moving up. Food prices play an important role in this process,” he said. However, Gokarn noted that yields on 10-year government bonds had remained steady, suggesting that investors' expectations for inflation over this time horizon remained anchored. Meanwhile, speaking at a business forum with Finance Minister Pranab Mukherjee, US Treasury Secretary Timothy Geithner said India had outgrown its financial system and called for cooperation on reforms that would deepen India’s capital markets and allow US companies more access to them. He said India’s future growth largely depended on the “next wave” of financial reforms. The two finance ministers and their top lieutenants will participate in annual economic talks in Washington on Tuesday. “I think, from our perspective, the most important thing we would like to see is progress on financial reforms that provide a deeper, more liquid market for corporate debt for infrastructure financing, that allow a little more access of American companies and their technology in the financial area,” Geithner said. “Our interests are pretty complementary as a whole,” he added. The second instalment of the US-India Economic and Financial Partnership talks, launched last year in New Delhi, are not likely to stir acrimony. The two democracies, both powered by domestic-led growth with market-driven currencies, have many common goals.

BS