India’s Rate-Increase Cycle ’Nearing Its End,’ Gokarn Says
Reserve Bank of India Deputy Governor Subir Gorkan
Kuni Takahashi/Bloomberg
Subir Gokarn, deputy governor of the Reserve Bank of India,
Subir Gokarn, deputy governor of the Reserve Bank of India, Photographer: Kuni Takahashi/Bloomberg
India’s central bank is close to the end of its record series of interest-rate increases as inflation will probably slow next year, Deputy Governor Subir Gokarn said.
“You could say that the cycle is nearing its end,” he said, “given the projection that inflation will start coming down and will continue to move down from December onwards.” He declined to specify when the Reserve Bank of India may stop raising rates.
The inflation rate will drop because “oil prices do not appear to be going higher,” and “we are seeing some deceleration in domestic growth because demand is being moderated,” Gokarn said in an interview in New York yesterday. Rising interest rates have helped slow consumer demand, he said.
The Reserve Bank boosted India’s repurchase rate for the sixth time this year on Sept. 16, increasing benchmark borrowing costs by a quarter of a percentage point to 8.25 percent as policy makers seek to tame the fastest inflation among the biggest emerging markets. Indian wholesale prices rose 9.78 percent in August from a year earlier.
“Inflation will slow in the coming months due to a combination of past rate increases and the slowdown in the global economy,” said Dharmakirti Joshi, a Mumbai-based economist at ratings company Crisil Ltd. “The global slowdown will cool inflation but the fall in the rupee could offset the effect.”
Bear Market
Global stocks fell, pushing the MSCI All-Country World Index of 45 nations into a bear market for the first time in more than two years, after the worsening European debt crisis and threat of a U.S. recession erased more than $10 trillion from equities since May.
Asian stocks pared declines after finance chiefs from the Group of 20 nations said they would address “heightened downside risks” from sovereign debt and a slowing global economy.
The Bombay Stock Exchange Sensitive Index fell 0.9 percent at 10:54 a.m. in Mumbai. The rupee weakened 0.4 percent to 49.76 per dollar, extending its decline this quarter to 10.2 percent, the second-biggest drop in a basket of 10 Asian currencies excluding Japan’s yen, according to data provided by Bloomberg.
India’s 10-year bonds headed for the biggest weekly gain in two months on speculation the central bank will refrain from raising rates further amid turmoil in global financial markets.
Yields Decline
The yield on the 7.8 percent securities due April 2021 fell seven basis points, or 0.07 percentage point, this week to 8.30 percent, according to the central bank’s trading system. It was the biggest decline since the period ended Aug. 5.
The Indian central bank’s move last week contrasted with other central banks in the so-called BRIC nations. Brazil unexpectedly cut its target Selic rate last month to shield the Latin American economy from a global slowdown, and Russia reduced the rate charged on repurchase loans on Sept. 14 in a bid to bolster the amount of cash on the market amid sliding oil prices.
Duvvuri Subbarao, Governor of the Reserve Bank, has raised borrowing costs by a total 350 basis points since mid-March 2010, the fastest run of rate increases since the central bank was established in 1935, Bloomberg data show.
“Our inflation pressures stem from a bunch of factors that are unique to our economy,” Gokarn said. “Unlike many countries, whose growth comes significantly from export contributions, we are slightly more skewed to our domestic environment.”
The global downturn may “help us to manage inflation,” as commodity prices drop and demand for exports weakens, Gokarn said.
India’s $1.7 trillion economy expanded 7.7 percent in the three months ended June 30 from a year earlier, the slowest pace of growth since the last quarter of 2009.
Inflation still remains a “key risk” for India and there is a “likelihood of inflation remaining high for the next few months,” the central bank said in a statement after announcing the last rate increase on Sept. 16.
To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Stephanie Phang at sphang@bloomberg.net
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