“The stance now is that we have reached the peak and any further action will be toward easing,” Gokarn, 52, said in an interview at his office while discussing the rupee, the government’s budget deficit and bond repurchases. The central bank isn’t concerned about the currency’s record monthly advance in January “because in a sense it’s a correction,” following last year’s 16 percent decline, he said.
Emerging-markets have stepped up efforts to shield growth from the impact of Europe’s debt crisis, with Brazil, Russia and the Philippines cutting rates in recent months. The Indian government can help reduce borrowing costs by narrowing its budget deficit as the pace of price increases slows to 7 percent by March from 9.68 percent a year earlier, according to Gokarn.
Once the central bank has confidence that the “direction will continue, that’s really going to be the trigger,” Gokarn said in the interview yesterday. “The visibility of the decline, I think, is the most important indication.”
Higher government spending on subsidies in the run-up to federal elections in two years threatens to stoke prices and limit the scope for monetary policy easing to support growth in Asia’s third-largest economy. The nation’s budget deficit reached 92.3 percent of the fiscal-year target in the nine months through December, a report showed this week.
“The comments clearly indicate the direction of the monetary policy is towards reducing rates,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. (YES) “The timing and the quantum of rate cuts will still be dependent on the cut in the budget deficit.”
Asian Stocks Slip
Asian stocks fell as Greece and its creditors struggled to reach an agreement on a debt swap and companies from Mazda Corp. to Nippon Sheet Glass Co. forecast losses. The MSCI Asia Pacific Index declined 0.21 percent as of 12:23 p.m. in Tokyo.
Elsewhere in Asia, a gauge of China’s non-manufacturing industries expanded at a slower pace in January, a report showed today. The non-manufacturing purchasing managers’ index fell to 52.9 from 56 in December, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in a statement in Beijing. A reading above 50 indicates an expansion.
Australia’s services industry expanded in January, snapping three straight months of declines, a report showed today. The performance of services index advanced 2.9 points to 51.9 in January, the highest reading since August, Commonwealth Bank of Australia and the Australian Industry Group said in Sydney today. Fifty is the dividing line between expansion and contraction.
Sri Lanka Raises
The Central Bank of Sri Lanka unexpectedly boosted interest rates today for the first time since 2007 to curb credit growth and ensure inflation stays low. It raised the reverse repurchase rate to 9 percent from 8.5 percent and the repurchase rate to 7.5 percent from 7 percent. All seven economists in a Bloomberg News survey predicted rates would be unchanged.
In Indonesia, growth probably exceeded 6 percent for a fifth quarter, a Bloomberg survey showed ahead of a government report due Feb. 6. Gross domestic product increased 6.45 percent in the fourth quarter from a year earlier, compared with a 6.5 percent pace in the previous three months, according to the median of 17 estimates.
In Europe, a rescue plan for Greece may be completed in coming days, European officials and creditors say. The plan may include a loss of more than 70 percent for bondholders in a voluntary exchange and loans likely to exceed the 130 billion euros ($171 billion) now on the table.
Fastest in BRIC
In the U.S., Federal Reserve Chairman Ben S. Bernanke said the central bank will seek to keep prices rising at a 2 percent rate and rejected suggestions that it would sacrifice its inflation goal to boost employment.
India’s benchmark inflation rate of 7.47 percent is the fastest among the so-called BRIC nations, even as it slowed to a two-year low in December. Consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China the same month.
“While we have a medium-term goal of 4 to 4.5 percent for inflation, that’s not a threshold that we have to reach before we consider action,” Gokarn said in his office, adorned by photographs and books, including a biography of Apple Inc. founder Steve Jobs. “It’s the directionality.”
Maruti Suzuki India Ltd. (MSIL), maker of half the cars sold in India, has raised prices of all its models this year, citing higher raw material costs and the decline in the currency.
Indian Bonds Climb
The yield on the 8.79 percent government bonds due November 2021 declined one basis point, or 0.01 percentage point, to 8.12 percent in Mumbai today, according to the central bank’s trading system.
The rupee plunged 16 percent last year, making it the worst performing currency in Asia and prompting the central bank to clamp down on speculation. It rose 0.1 percent to 49.10 against the dollar today after gaining 7.3 percent in January.
The central bank last year tightened rules on trading in the domestic currency-forwards market and said it will reduce the amount of open positions dealers can maintain overnight.
“The measures we have taken always come at a cost,” Gokarn, a former Asia-Pacific chief economist with Standard & Poor’s, said. When markets return to “normality, then of course these measures will be considered and taken back.”
Yesterday the central bank asked lenders to “rigorously evaluate” risks from their clients’ unhedged foreign-exchange positions. Gokarn in the interview said the central bank wants to encourage hedging.
To control inflation, the Reserve Bank raised borrowing costs by a record 375 basis points in 13 moves from mid-March 2010 before pausing for a second straight meeting in January. Last month, it cut India’s growth forecast to 7 percent in the year through March from the 7.6 percent predicted in October. It kept the inflation estimate at 7 percent.
The central bank lowered the cash reserve ratio to 5.5 percent from 6 percent, reducing the amount of deposits lenders need to set aside as reserves for the first time since 2009 in a move it estimated would add about 320 billion rupees ($6.5 billion) into the banking system.
In an indication of cash shortages, banks borrowed 1.3 trillion rupees on average a day from the monetary authority in January, compared with 1.16 trillion rupees in December, according to data compiled by Bloomberg. Overnight rates surged to 9.45 last week, near a three-year high.
To ease the cash squeeze in the banking system, the Reserve Bank resumed open-market purchases of government notes after 10 months in November and has so far purchased 719 billion rupees of the securities in auctions, official data show.
Indian bonds fell the most in 26 months on Jan. 24 on speculation the central bank will halt buying government bonds after reducing reserve requirements for banks.
“To the extent that pressures remain, we are always open to carrying out” bond repurchases, Gokarn said. “The other form of liquidity infusion is to buy dollars. If circumstances are right, we’ll certainly consider it. When we’ll have those circumstances is difficult to say.”
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