India’s inflations suddenly increased in the month of May to 10.16%, this resulted in the bond yields moving to a one month high as the pressure is increasing on the central bank to increase the borrowing cost.
In April a 17.6% increase in industrial output was recorded which shows the increasing consumer demand, this is in turn pushing up the prices. The Reserve Bank of India (RBI) mentioned that it will not tighten the monitory policy at once but do it gradually because if the challenges in economic growth that may crop up due to the sovereign debt crisis in Europe.
Mr. Brian Jackson, a strategist working for Royal Bank of Canada and based out of Hong Kong mentioned that “They don’t want to go too fast on raising rates but the risks are that they are going too slow now, Controlling inflation should be the RBI’s top priority.”
The yield on the government bonds of 10 years horizon at 12:45 in Mumbai increased to 7.64%, which is a rise of 3 basis points. The SENSEX or the 30 stock sensitive index touched 17,225.45 at the same time which is an increase of .9%. Same time the dollar declined against the rupee and the rupee rose by .5% to 46.57.
The Reserve Bank of India has acted twice on the interest rates in last three months by bringing in an increase of .25 percentage points during each action. Currently the benchmark reverse purchase rate stands at 3.75%.
On June 7 Mr. Subir Gokarn who is the deputy governor of the Reserve Bank of India mentioned that, aggressive actions may reverse the steps if the global growth falter.
Currently both China and India which are the two fastest growing economies in Asia are fighting against Inflation. The European sovereign debt crisis has not show to have much effect on these two countries.
In May China witnessed the fastest increase in the consumer price inflation in last 19 months as it increased to 3.1%. This is a clear indicator of the overheating in the Chinese economy.
Mr. Duvvuri Subbarao who is the governor of the Reserve Bank of India has other reasons also to seriously consider the tightening of the monetary policy.
Mr. Kaushik Basu who is the chief economic adviser in the Indian ministry of finance mentioned on June 3 that the recent auctions for the third generation (3G) mobile phone services in India has drained the liquidity out of the system. The Reserve Bank of India should consider the credit crunch created by the 3G auctions when it is setting the rates. Currently the telecom operators in the country including Bharati Airtel and others are gearing up to pay $ 14.5 billion to the government for the wireless permits thus the Reserve Bank of India eased the rules till 2 July on 27 May, this was done to give an impetus to liquidity.
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