India to Keep Monetary Policy Tight, Chidambaram

India will maintain a ``fairly tight'' monetary policy to curb inflation that may be stoked by rising crude oil prices and consumer demand, Finance Minister Palaniappan Chidambaram said.

``We have to do our best to keep inflation down in a world where fuel prices are flaring up, commodity prices are increasing and demand remains high in China and India,'' Chidambaram, 61, said in an interview yesterday in New Delhi.

Indian bonds fell the most in more than a month after Chidambaram's comments. Bond investors in India had previously been expecting interest rates, which have risen since October 2004, to ease after inflation fell to near a 13-month low and record growth in bank loans slowed.

``I would expect the Reserve Bank of India to maintain the status quo,'' said D.H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi. ``The central bank has a difficult task to keep inflation within acceptable limits and at the same time not allow the rupee to appreciate too much and hurt exports.''

The yield on the benchmark 7.49 percent note due April 2017 rose 6 basis points, or 0.06 percentage point, to 7.84 percent as of 12:40 p.m. in Mumbai, according to the central bank's trading system. The yield had declined 42 basis points in the month to yesterday, partly on optimism the central bank this month may refrain from raising borrowing costs further.

`Still Concerned'

Chidambaram, whose ruling Congress party faces national elections by May 2009, wants to drive down inflation to as low as 4 percent. India's benchmark wholesale price inflation rate fell by a third to 4.27 percent in the week ended June 30 from a two-year high in January. Rising prices caused the Congress party to lose power this year in two states and fall further behind in the most populous province of Uttar Pradesh.

``I am still concerned about commodity prices, prices of food grains, edible oils and most importantly, I am very concerned about crude oil prices,'' said Chidambaram, who holds a Harvard MBA and is a lawyer by training. ``Inflation is low because we kept a tight control over money supply and we have allowed the rupee to appreciate a bit.''

The Reserve Bank of India, which will release its next monetary policy statement on July 31, increased its key overnight lending rate six times in the past 1 1/2 years and also raised its cash reserve ratio, or the proportion of deposits commercial banks need to maintain with the central bank, three times since December.

Loan Growth

That helped slow the growth in loans to consumers and companies to 23.4 percent in the year to June 29 compared with a 31.8 percent gain in the same period last year, the central bank said July 13.

Still, India has expanded at a record 8.6 percent average pace since 2003, making it the world's second-fastest growing major economy and increasing the consumption of oil. India currently imports almost three-quarters of its oil needs.

Crude oil approached an 11-month high in New York yesterday, after an Energy Department report showed that U.S. gasoline inventories unexpectedly fell last week. The price of oil is up 23 percent this year.

India may increase gasoline and diesel prices because of the rise in oil prices, the Financial Express reported July 2, without saying where it got the information.

``Rising crude oil does not necessarily mean higher local fuel prices,'' said Chidambaram. ``It means our subsidy bill can go up'' as the government prevents higher oil prices from filtering into the economy.

Fuel Subsidy

Indian Oil Corp., the nation's largest refiner, and its state-run counterparts are barred by the government from raising fuel prices in line with crude oil costs to control inflation.

India plans to spend 28.4 billion rupees ($702 million) on compensating the refiners for subsidizing fuel in the year that started April 1, compared with 27.85 billion rupees a year ago, according to budget estimates made in February.

India's other inflation-fighting measures are also adding to the country's subsidy bill, which makes up about a tenth of the federal budget.

The gain in the rupee to a nine-year high has helped reduce imports of oil and other products and contain inflation, but ``it does pose some other problems,'' Chidambaram said yesterday.

``Exporters are complaining,'' he said. ``We have given some incentives to our exporters.''

India this week eased interest rates and increased the tax refund limit for small and medium-sized exporters to cushion them from a 9.5 percent gain in the currency this year. The relief to textile, leather, handicraft and other exporters will cost the federal government 13 billion rupees, the finance ministry said on July 12.

India's currency surged as the central bank slowed dollar purchases on concern rupee funds injected from the exercise will stoke inflation.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net .