India Holds Key Rate as RBI's Subbarao Resists Easing Calls

India’s central bank left interest rates unchanged for a fifth straight meeting, as the fastest inflation among the biggest emerging nations inhibits scope for monetary easing sought by the government.

Reserve Bank of India Governor Duvvuri Subbarao kept the repurchase rate at 8 percent, according to a statement in Mumbai today. The decision was predicted by 25 of 27 economists in a Bloomberg News survey, with two expecting a reduction. The central bank also held the cash reserve ratio for lenders at 4.25 percent after a cut in October.

Subbarao has so far withstood calls from Finance Minister Palaniappan Chidambaram for lower rates to bolster an economy forecast by the government to expand at the slowest pace in a decade this fiscal year. Slowing gross domestic product and Prime Minister Manmohan Singh’s policy overhaul to revive growth may prompt the governor to respond to “threats to growth from this points onwards,” according to the RBI statement.

“The inflation picture is still not comforting enough for the central bank to let down its inflation guard,” Leif Eskesen, Singapore-based chief India and Southeast Asia economist for HSBC Holdings Plc, said before the decision. “Rate cuts are contingent on inflation coming down, tangible progress on fiscal consolidation and continued structural reforms.”

Sensex, Rupee

The BSE India Sensitive Index fell 0.4 percent yesterday, while the rupee declined 0.7 percent to 54.85 per dollar, after the Finance Ministry cut its forecast for India’s growth to about 5.7 percent to 5.9 percent in the year through March from an earlier estimate of as much as 7.85 percent. That would be the smallest gain since the year ended March 31, 2003, when gross domestic product grew 4 percent.

The RBI on Oct. 30 cut its projection for economic growth to 5.8 percent from 6.5 percent and raised its inflation forecast to 7.5 percent by March 2013 from 7 percent.

The rupee has appreciated since Sept. 13, when Singh’s administration jump started stalled policy changes. The government, striving to avert a credit-rating downgrade, snapped months of policy paralysis in September by opening the nation’s retail industry to overseas retailers such as Wal-Mart Stores Inc. and curbed energy subsidies. More recently, it also set up a panel to accelerate infrastructure projects and approved changes to a century- old land law to help curb often violent protests that have delayed projects.

‘Investor Confidence’

“Both fiscal and monetary policies, however, would need to be supportive to sustain investor confidence,” the Finance Ministry said yesterday. A moderation in inflation that may commence in the January-to-March quarter and benign global commodity prices will “facilitate softening of the monetary policy stance of the RBI,” it said.

India’s inflation rate remains the fastest among the BRIC group of emerging nations that also includes Brazil, Russia and China. The country’s benchmark wholesale-price gauge slowed to 7.24 percent in November. Consumer prices climbed 9.9 percent last month.

Consumer price inflation “increased in November, reflecting sustained food inflation pressures,” according to the RBI statement. Still “the decline in core inflation has been comforting. In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth.”

Trade Deficit

India’s economy expanded 5.3 percent in the three months ended Sept. 30 from a year earlier, slowing to match a three-year low. The country’s trade deficit held near the widest in more than 18 years in November as exports fell for a seventh month.

Local passenger car sales by companies such as Maruti Suzuki India Ltd. fell 8.3 percent in November from a year earlier, according to Society of Indian Automobile Manufacturers data. Foreign direct investment fell 60 percent in the five months through August compared with a year earlier.

“India is faced with a very difficult situation with high inflation and deficits and sub-par growth,” said Arun Singh, an economist at Dun & Bradstreet Information Services India Pvt. in Mumbai. “There is a real threat of ratings downgrade and the need of the hour is to implement economic reforms swiftly.”

Finance Minister Palaniappan Chidambaram has called for cheaper credit to back the government push to spur growth, and pledged on Oct. 29 to contain the budget deficit as officials sought to increase scope for a rate cut. He said after the RBI held rates in October that “growth is as much a challenge as inflation.”

To contact the reporter on this story: Kartik Goyal in Mumbai at

To contact the editor responsible for this story: Stephanie Phang at

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