India inflation notches up to 5.7% in Jan – RBI chief says lenders need ‘deep surgery’

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NEW DELHI, Feb 12, (AFP): India’s consumer price inflation quickened slightly to 5.7 percent in January, official data showed Friday, presenting a potential headache for Prime Minister Narendra Modi ahead of the national budget due later this month.

The acceleration from a 5.6 percent rise in December marks the sixth month in a row that inflation gained pace, with the rate driven up by higher food prices.

“The pick-up was in large part due to a rise in food inflation, the result of delays in the sowing of the rabi (winter) crop amid unusually warm temperatures in recent months,” Shilan Shah, India Economist at Capital Economics, wrote in a note.

January’s inflation was higher than expected, with the median estimate of 36 economists in a Bloomberg News survey predicting prices would rise 5.4 percent last month.

However, it still fell comfortably within the central bank’s short-term target to keep inflation below six percent until January 2016.

Modi’s right-wing government will present its next budget on February 29 amid growing pressure to deliver long-awaited economic reforms.

India’s central bank kept interest rates on hold at 6.75 percent earlier this month, citing the importance of controlling inflation and a slowing growth momentum in Asia’s third-largest economy.

Meanwhile, the head of India’s central bank has said the country’s lenders may need to perform “deep surgery” to sort out bad loans and clean up their balance sheets.

Reserve Bank of India governor Raghuram Rajan, who famously predicted the 2008 world financial crisis, has set Indian banks a deadline of March next year to tidy up their non-performing assets.

Gathering

And he told a gathering of banking leaders in India’s commercial capital Mumbai on Thursday that getting those stressed loans in order “may require deep surgery” not “band aids”.

“Existing loans may have to be written down somewhat because of the changed circumstances since they were sanctioned,” said Rajan, a former International Monetary Fund chief economist.

“But to do deep surgery such as restructuring or writing down loans, the bank has to recognise it has a problem — classify the asset as a non-performing asset (NPA),” he added.

Bad debts and poor loan provisions, especially among India’s state-owned banks, are hampering investment at a time when Asia’s third-largest economy needs more lending to boost economic growth.

Encouraging banks to identify loans that are in default or close to increases transparency and means the government can force lenders to make provisions to cover them where necessary, making the banks more stable in the long run.

Rajan is known for his outspoken nature, breaking the mould of central bankers globally who are generally extremely guarded.

“Think therefore of the NPA classification as an anaesthetic that allows the bank to perform extensive necessary surgery to set the project back on its feet,” he said.

“If the bank wants to pretend that everything is all right with the loan, it can only apply band aids — for any more drastic action would require NPA classification,” the governor added.

Rajan added that while reforms would likely hit banks immediately, in the future it would be beneficial for India’s economy as a whole.

“While the profitability of some banks may be impaired in the short run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way,” he added.

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