Risks to Indian Economic Stability Have Risen, Reserve Bank Says

Slower Indian expansion and threats from trade and budget deficits have increased the economic risks the nation faces, its central bank said.

“Relatively high” inflation, lower savings and moderating investment and consumption have boosted risks, the Reserve Bank of India said in its biannual Financial Stability Report today. It flagged a “high” current-account gap, “stressed” fiscal position and rising corporate leverage and falling profitability.

The monetary authority left interest rates unchanged for a fifth meeting on Dec. 18, while signaling it may cut borrowing costs in coming months to spur Asia’s third-largest economy as price pressures ebb. India’s potential growth rate may have declined to about 7 percent, according to the report, compared with 8.5 percent before the onset of the global financial crisis.

“The euphoria over BRICS as a growth engine has been dented,” Governor Duvvuri Subbarao said in the report, referring to the emerging markets of Brazil, Russia, India, China and South Africa. “Confidence in the financial sector remains low, uncertainty persists and investment climate globally is yet to revive.”

The report also highlighted “large foreign currency denominated overseas borrowings with unhedged exposures” at many Indian companies in a period when exchange-rate volatility remains “elevated.”

Indian inflation, as measured by the wholesale-price index, has exceeded 7 percent for most of this year. It eased to a 10- month low of 7.24 percent in November. Subbarao has left the benchmark interest rate unchanged since a 50 basis points cut to 8 percent in April this year.

India yesterday cut the goal for annual economic growth in the five years to 2017 to 8 percent from 8.2 percent, and signaled further fuel-price rises to limit subsidies that have stoked the budget gap. Gross domestic product rose 5.3 percent last quarter from a year earlier, matching a three-year low.

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net;

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

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