Slowing inflation may be temporary because Prime Minister Manmohan Singh yesterday approved raising retail fuel prices for the first time in 20 months. India's central bank kept interest rates at a five-year high on Jan. 29, citing concern that fuel and food costs may fan inflation in Asia's third-largest economy.
Higher borrowing costs are putting a brake on demand for homes, motorbikes and other consumer durables, and this is significant since consumer spending has been a key driver of India's economic growth in recent times. Bajaj Auto - India's second- biggest motorcycle maker - reported recently that sales fell in January as local demand declined. Sales of motorcycles, three-wheeled auto rickshaws and scooters fell 16 percent to 192,193 in January from 229,583 a year earlier. That aggregate number included exports of 43,533 units, a gain of 9.3 percent.
But there seems to be something of a tussle going on between the Finance Ministry and the Central Bank over what to do about the situation. India's government announced on Feb 7 that India's economy may well only expand by 8.7 percent in the fiscal year ending March 31, which would be the slowest pace in three years, and the slowdown is in part the result of higher interest rates, and in part a consequence of the higher rupee, which makes India's exports more expensive.
On February 12 Finance Minister Palaniappan Chidambaram asked state-run banks to provide more loans for the purchase of homes and consumer goods after asking banks to cut interest rates last month. But it is not clear that they are of the same mind over at the Reserve Bank of India. Inflation is constantly being stressed, and needs to be brought down further, according to central bank Deputy Governor Rakesh Mohan yesterday in New Delhi, speaking just before the announcement of a fuel-price increase. ``The inflation rate is still high by global standards," he is quoted as saying. The Singh cabinet approved raising the retail gasoline price by 2 rupees (5 U.S. cents) a liter and the cost of diesel by 1 rupee a liter,yesterday.
Previously, the government had capped fuel prices and lowered import duties over the past year to curb inflation. It hadn't allowed any rise in fuel prices since June 2006, even as the cost of crude oil surged 57 percent last year and climbed to $100 a barrel in January.
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