India Holds Rate for Third Meeting as Inflation Accelerates

India’s central bank left interest rates unchanged for a third consecutive meeting after inflation accelerated and as it awaits steps to curb the fiscal deficit in the budget tomorrow.

The Reserve Bank of India kept the repurchase rate at 8.5 percent, it said in a statement in Mumbai today. The outcome was predicted by 19 of 22 economists in a Bloomberg News survey, with three forecasting a quarter-point reduction. It reiterated that future actions will be toward lowering rates.

India joins nations from Indonesia to South Korea in holding borrowing costs this month, juggling price pressures with the need to prevent a deeper growth slowdown as investment falls and Europe’s debt crisis hurts exports. The central bank has signaled rate cuts to counter the weakest expansion in almost three years depend on a sustained easing in inflation and moves to curb the largest budget gap among BRIC economies.

Oil prices and the decline in the currency pose a huge worry for the inflation trajectory,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Gurgaon, near New Delhi. “The RBI wants to see an indication of reduction in the fiscal deficit in the budget tomorrow before embarking on cutting rates.”

India’s benchmark bonds extended a decline and the rupee weakened after the decision. The yield on the 8.79 percent note due November 2021 was at 8.36 percent as of 1:35 p.m. in Mumbai, according to the central bank’s trading system, compared with 8.29 percent before the announcement. The rupee fell 0.8 percent to 50.325 per dollar, while the stocks index fell 1.6 percent.

Inflation Risks

“Recent growth-inflation dynamics have prompted the Reserve Bank to indicate that no further tightening is required and that future actions will be towards lowering the rates,” it said in today’s statement. “However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions.”

The monetary authority also said “upside risks” to inflation have increased from the recent surge in crude oil prices, “fiscal slippage” and rupee depreciation. It added “credible fiscal consolidation” will be an “important factor” in shaping the inflation outlook.

Growth in the $1.7 trillion economy slowed for the fourth straight quarter from a year earlier in the three months through December. GDP will probably climb 6.9 percent this fiscal year, the least since 2009, the government forecasts.

Can’t Delay Cuts

“Even though there are risks from oil prices, the fiscal deficit and the rupee’s decline, the huge growth slowdown requires that the RBI starts cutting rates,” said Indranil Sen Gupta, a Mumbai-based economist at Bank of America Merrill Lynch. “I don’t think they can delay rate cuts beyond April.”

India’s fiscal deficit may reach 6.1 percent of gross domestic product in the year through March 2012, according to Nomura Holdings Inc., defeating Finance Minister Pranab Mukherjee’s plan to contain it at 4.6 percent. Slower expansion has sapped tax receipts even as subsidies and a job guarantee program for rural workers spur spending.

Inflation was 6.95 percent in February, quickening for the first time in five months after exceeding 9 percent for most of 2011. The central bank predicts a gain in the benchmark wholesale-price index of 7 percent by March.

BRIC’s Fastest

The monetary authority raised borrowing costs by a record 3.75 percentage points from 2010 to October last year to fight price rises. The RBI unexpectedly cut the amount of deposits lenders need to set aside as reserves on Jan. 24 and March 9 to ease a cash squeeze, lowering the cash reserve ratio a combined 1.25 percentage points to 4.75 percent.

Inflation in Asia’s third-largest economy remains the fastest in the BRIC group, which also includes Brazil, Russia and China, eroding purchasing power in a nation where more than two-thirds of the population lives on less than $2 per day.

Tata Motors, the country’s biggest automaker by value, raised car prices by as much as 12,000 rupees ($239) on Feb. 8. Indian Railways, Asia’s oldest network, plans to raise passenger fares for the first time in a decade.

Brent crude, the benchmark for almost all of India’s imports, has jumped about 17 percent so far this year. India imports three-quarters of its oil.

‘Unjustified’

“It’s unjustified to expect the RBI to start cutting rates given the risks to inflation from higher crude prices and fiscal slippage,” said Deepali Bhargava, Mumbai-based chief India economist at Espirito Santo Securities.

India’s gross domestic product may rise as much as 7.85 percent in the year starting April 1, Mukherjee’s advisers said in a report today. The annual Economic Survey said the government should target and cap subsidies it pays for food grains, fertilizers and fuels including diesel.

Investors from ICICI Securities Primary Dealership Ltd. to Yes Bank Ltd. (YES) predict Mukherjee will announce steps to cut the deficit to 5 percent of GDP in the year to March 2013 rather than ramp up spending to aid expansion, a Bloomberg survey showed.

Gross fixed capital formation, a measure of investment in items such as factories and roads, fell 1.2 percent last quarter from a year earlier, following a 4 percent tumble.

Prime Minister Manmohan Singh is trying to preserve an economic turnaround that began in the 1990s. His ruling Congress party was routed in regional elections this year.

Allegations of graft against officials, inflation and policy reversals have hurt Singh’s agenda. Among the setbacks was the suspension in December of plans to open India’s retail industry to foreign companies such as Wal-Mart Stores Inc. (WMT)

“What India needs is to quickly put in place all the policy reforms if it wants to accelerate growth to more than 8 percent,” said Jay Shankar, an economist at Religare Capital Markets Ltd. in Mumbai. “Unfortunately, the government is weakened after the state elections.”

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net.

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