India acts to quash inflation, guard food supplies

By V.Ramakrishnan and Surojit Gupta

MUMBAI/NEW DELHI (Reuters) - India unveiled measures on Tuesday to tame inflation and guard food supplies, slapping export taxes on basmati rice and some steel products and tightening monetary policy.

In its second move this month to drain liquidity from the banking system, the Reserve Bank of India is raising the cash reserve ratio (CRR) by 25 basis points to 8.25 percent, its highest level in seven years, with effect from May 24.

It signaled it was ready to act again if price pressures continued to build.

"It is critical at this juncture to demonstrate on a continuing basis a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations," it said in its annual policy review.

Finance Minister Palaniappan Chidambaram put various measures before parliament, including the export taxes on basmati rice and steel products and a duty cut on imports related to steel production. India has already banned non-basmati rice exports.

India's annual wholesale price inflation was at three-year highs above 7 percent in mid-April, as policy planners the world over grapple with soaring food and raw material prices.

India, which has about 260 million poor, is sensitive to rising prices because food often accounts for a much higher proportion of people's expenditure than in developed economies.

Part of the price pressures have stemmed from supply constraints at home as well as rising prices abroad, and the central bank, aware continued investment and growth are needed to fix those constraints, left its key interest rates unchanged.

The stock market, relieved borrowing costs were not going up, rose 2.1 percent and the 10-year bond yield fell 20 basis points on the day to 7.94 percent. The rupee touched its lowest in six weeks on dollar buying for oil and a large defense-related order.

NOT ENOUGH

India's move comes just as U.N. agencies and the World Bank called on nations not to restrict food exports to secure home supplies. The Asian Development Bank has also said banning exports is no different from hoarding at a national level.

Fighting inflation has become a top priority for India's government as it heads towards an election due by May 2009.

Prime Minister Manmohan Singh told a group of businessmen on Tuesday the world community had not done enough to bring down food and fuel prices.

"The diversion of land from food crops to biofuels and increasing use of available food grains and vegetable oils for the production of biofuels have greatly contributed to the rising food prices," Singh said.

He said he was deeply dismayed by the global response to soaring energy prices, as world oil demand had risen by just 1 percent annually over the past two years while crude oil prices had shot up by over 90 percent in dollar terms.