India Central Board May Raise Interest Rates as Higher Prices Spur Protest

India’s central bank is likely toraise interest rates for the fourth time since March after astrike to protest rising prices brought much of the nation to ahalt this month.

The Reserve Bank of India will probably increase itsreverse repurchase rate by a quarter-point to 4.25 percent, all20 forecasts in a Bloomberg News survey showed. It will raisethe repurchase rate to 5.75 percent from 5.5 percent at the11:15 a.m. announcement in Mumbai tomorrow, according to all butone analyst, who expects it to be kept unchanged.

Indian opposition parties, the organizers of the strike,may focus on attacking Prime Minister Manmohan Singh’sgovernment for inflation when parliament opens its next sessiontoday. Surging prices in Asia’s biggest economy after Japan andChina have also triggered demands for higher wages at companiesincluding Nokia India Pvt.

“The general strike called in early July shows thatcontinued double-digit inflation has developed into a bigpolitical problem,” said Kevin Grice, an economist at CapitalEconomics Ltd. in London. “The government is now urging the RBIto do all that is needed to bring inflation down.”

Consumer prices paid by industrial and farm workers inIndia are running close to 14 percent, government data showed.That’s the most after Venezuela’s 32 percent inflation rate,according to Bloomberg data compiled from 82 countries.

Swap Rates

The cost of India’s one-year interest-rate swaps,derivatives used to guard against fluctuations in borrowingcosts, was at 5.89 percent on July 23, near a 20-month high,signaling investors are bracing for further increases inbenchmark rates. The Bombay Stock Exchange’s Sensitive Index hasgained 2.4 percent this month while the rupee lost 1 percent to46.94 against the dollar.

“We plan to continue to oppose the government’s policiesthat have fueled inflation,” said Ravi Shankar Prasad, aspokesman at India’s main opposition Bharatiya Janata Party.“The poor are reeling under inflation due to the failedeconomic policies and mismanagement of the government.” Theparty led the July 5 countrywide strike.

Singh’s top economic advisers, Chakravarthy Rangarajan andMontek Singh Ahluwalia, urged the central bank this month totighten borrowing costs, saying inflation above 10 percent isnot acceptable.

Step Ahead

A rate increase will put Governor Duvvuri Subbarao ahead ofhis counterparts in Asia in tightening monetary policy as theregion leads the global economic recovery. Malaysia has raisedrates three times this year, while Korea and Thailand haveincreased them once. The Philippines and Indonesia have keptthem on hold.

Prices are rising in India as its record 8.4 percentaverage economic growth since 2004 is straining capacities inroads, ports and factories. China expanded an average 10.1percent during the same period and consumer prices rose 2.9percent in the country in June.

“India has always been underinvested and if you look atChina, they are very strongly invested and that’s one of thereasons why China can grow very fast without seeing inflationarypressures” said Frederic Neumann, a Hong Kong-based economistat HSBC Holdings Plc. “The key to changing that over time willbe to raise investment.”

In 2009, China’s investment rate was 45 percent of itsgross domestic product compared with 37 percent in India,Neumann said.

Power Costs

Higher investment helped China produce 346.7 billionkilowatt-hours of power last month, data from the Beijing-basedNational Bureau of Statistics showed. That’s about six times theelectricity generated in India each month, according to thenation’s Central Electricity Authority, forcing most companiesto invest in back-up generators, which push up costs.

Even so, manufacturers in India are augmenting theircapacities to benefit from an economy that Goldman Sachs GroupInc. says will become the biggest after China and the U.S. by2050.

Apollo Tyres Ltd., India’s largest tire manufacturer bysales, added a fourth plant in April to boost capacity by 50percent. Tata Steel Ltd., India’s largest producer, last monthwon environmental approval to increase steelmaking capacity by43 percent to 9.7 million metric tons.

Accelerating Inflation

For now, India’s benchmark wholesale-price inflation mayaccelerate in July, the government’s top statistician T.C.AAnant said this month, after Singh’s government raised prices ofgasoline and diesel on June 25 in a bid to cut the oil subsidyand narrow the budget deficit.

The wholesale-price index jumped 10.55 percent in Juneafter climbing 11.23 percent in April, the most in 19 months.

Workers in several Indian factories went on strike inrecent weeks, demanding more pay as living costs rose.

Nokia said July 14 that it signed a long-term wageagreement with employees, resolving a strike at their factory inthe southern Indian city of Chennai. Neyveli Lignite Corp., alocal miner and power producer, also pledged to raise salariesafter employees stayed away from work.

“The biggest risk to the economy right now is inflation,”said Meghna Patel at STCI Primary Dealer Ltd. “The RBI willcontinue with its calibrated approach to raise interest rates.”