Indian Rate Cut Will Depend on Inflation Easing, Gokarn Says

India can only consider cutting interest rates when inflation starts to show “very sustainable signs of moving down,” Reserve Bank of India Deputy Governor Subir Gokarn said.

“Our position on that is very clear,” Gokarn said in Goa yesterday. “It’s always balancing between inflation risks and growth risks” and price gains are currently the “dominant” threat, he said.

The central bank refrained from joining a wave of rate cuts from China to Brazil in July as it fights the fastest inflation among the biggest emerging nations. A moderation in investment has contributed to the slowest economic growth in nine years and left bottlenecks unresolved, sustaining price pressures.

“We have both oil and food as pressure points that have re-emerged” Gokarn said in a question and answer session after a speech to the Forex Association of India. “We cannot ignore” that risk, he said. “If we do, there is a likelihood of inflation resurging very quickly and requires even more aggressive action. That’s not the scenario we want to take a chance on.”

Inflation eased to a 32-month low of 6.87 percent in July yet remains the highest among BRIC economies, the group of nations comprising Brazil, Russia, India and China. The plunge in the rupee and the impact on crops of the weakest monsoon since 2009 threaten to fan price rises.

Speaking in Bangalore on Aug. 18, Gokarn said there is a “high risk” that the increase in pulse prices will accelerate.

The rupee has weakened about 18 percent against the dollar in the past year. It slid 0.8 percent to 55.7450 per dollar in the week ending Aug. 17.

Elevated Inflation

The BSE India Sensitive Index rose 0.2 percent on Aug. 17, taking the week’s gains to 0.8 percent. The yield on the 8.15 percent government bond due June 2022 increased seven basis points, or 0.07 percentage point, for the week to 8.24 percent, according to the central bank’s trading system.

Prime Minister Manmohan Singh is struggling to salvage his development agenda as elevated inflation, graft scandals and gridlock over attempts to open up the economy deter investment. Reviving economic expansion is a matter of national security, Singh said in his annual Independence Day speech on Aug. 15.

Indian gross domestic product rose 5.3 percent in the three months through March from a year earlier, the least since 2003.

The Reserve Bank left interest rates unchanged for a second meeting last month at 8 percent. It hasn’t lowered the benchmark repurchase rate since a 0.5 percentage-point cut in April which was the first since 2009. The RBI’s next meeting is scheduled for Sept. 17.

Ratings Downgrade

Finance Minister Palaniappan Chidambaram said on Aug. 18 he urged banks to follow the State Bank of India which has lowered retail lending rates. He spoke in New Delhi after meeting the heads of state-run banks.

Risks such as a budget shortfall and a current-account deficit have led Standard & Poor’s and Fitch Ratings to say they may strip India of its investment-grade credit rating.

“Our formal stance is that actions needed to avoid such an outcome are very clear and we have been pushing for fiscal consolidation in a systematic way for quite some time,” Gokarn said yesterday in response to a question on the threat of a ratings downgrade. “It’s clearly from our viewpoint a factor that is weakening the transmission of our policy actions. It’s also a contributory factor to the risk perception.”

India’s budget deficit was 5.8 percent of gross domestic product in the 12 months ended March, the widest among the largest emerging markets. Singh’s administration is seeking to narrow the shortfall to 5.1 percent in the current fiscal year.

Curb Spending

Forecasters from Citigroup Inc. to Crisil Ltd., the local unit of Standard & Poor’s, predict the gap will instead widen as the government fails to curb spending sufficiently.

Moody’s Investors Service has said power blackouts on July 30-31, India’s worst, underscore infrastructure gaps and have a “credit negative effect” on economic activity.

Officials this year have stepped up the struggle to steady the rupee. The efforts include boosting the amount of government bonds foreign investors can buy and curbs on trading in currency derivatives to rein in volatility.

India has also moved to increase the supply of dollars by cutting the amount of overseas income companies can hold in foreign currency and raising interest rates on non-rupee deposits.

Sustained growth, a low current-account deficit and low inflation rate are needed for a stable currency, Gokarn said yesterday.

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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