India, China reign in inflation
March 22, 2010

Inflation is the new evil seeping into China and India, slowly eroding value, inflating asset bubbles and making common consumer durables such as food and clothes more expensive for the common man. In order to curb inflation, India’s apex bank, the Reserve Bank of India late on Friday raised the repo, the rate at which it lends to commercial banks, by 25 basis points to 5 per cent and raised the reverse repo, the rate it pays to banks for deposits, by 25 basis points to 3.5 percent. In China, on Monday, stocks fell in anticipation that China’s central bank, the People’s bank of China will follow suit, raising interest rates while tightening monetary policy. Beijing has already raised its bank reserve ratio twice this year to curb lending growth which exploded in 2009.

India, where prices were flat in mid-2009, has seen a massive year on year jump in its wholesale prices index from 8.6 percent in February to 9.89 percent now. China too, although considerable less announced 16-month high inflation figures of 2.7 percent in February, up from 1.5 percent in January and uncomfortably close to the 3 percent target set by Wen Jiabao, as industrial production grew 20.7 percent in the first two months of 2010, the most in more than five years.

Nonetheless, both economies, face different aspects of the inflation dagger. While India has witnessed massive food price rises in the past few months especially in staples like rice, sugar and wheat, China faces the threat of ballooning asset bubbles with property prices spiraling out of control.

While varied forces are to be blamed for the high price rise, analysts say the main fault lies in the demand side of inflation. The speed and breadth of the recovery generated by the last three-quarters of GDP growth, spurred substantial domestic spending in China and India, upping prices. According to DBS, the Singapore bank, private sector consumption is 7 percent higher than pre-crisis levels in the 10 largest Asian economies, excluding Japan. During the same time, private sector consumption in the US and Europe showed nil growth.

After loosening their purse strings to spur growth during the financial crisis, banks in both China and India are now keen to reign in inflation and speed up growth. As a result, following other nations in the region, both economies are further expected to raise interest rates and control excessive liquidity in the market.

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