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India Says Inflation, Trade Gap Constrain Policy Scope: Economy

Photographer: Dhiraj Singh/Bloomberg

Men walk past jewelry advertisements displayed in the Zaveri Bazaar area of Mumbai. Imports of gold and oil, and subdued exports, contributed to a current-account shortfall of $32.6 billion in October through December, or a record 6.7 percent of GDP. Close

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Photographer: Dhiraj Singh/Bloomberg

Men walk past jewelry advertisements displayed in the Zaveri Bazaar area of Mumbai. Imports of gold and oil, and subdued exports, contributed to a current-account shortfall of $32.6 billion in October through December, or a record 6.7 percent of GDP.

The Reserve Bank of India said the space for monetary policy to support economic growth remains constrained by elevated consumer-price inflation and a record current-account deficit.

“Monetary policy would need to be calibrated recognizing the very limited policy space available to ease further,” the Reserve Bank said yesterday in an economic review before today’s rate decision in Mumbai. It cited “significant” risks including a “high” current-account gap and “inflation above the threshold over which it becomes inimical to growth sustainability.”

India’s economy expanded at the weakest pace in a decade last fiscal year, and wholesale-price inflation slowed in March to a more than three-year low even as consumer inflation held above 10 percent. Governor Duvvuri Subbarao will cut the repurchase rate for a third straight meeting to 7.25 percent from 7.50 percent, 33 of 40 analysts said in a Bloomberg survey.

“The central bank will approach any further easing with a lot of caution,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. Sahay said she doesn’t expect further interest-rate cuts after a 25 basis-point reduction in the decision due at 11 a.m.

The yield on the government note maturing June 2022 has declined to 7.72 percent from 8.05 percent at the end of last year. The rupee has appreciated about 2 percent versus the dollar. The S&P BSE Sensex index has risen 1.6 percent.

‘Slow-Paced’

The central bank said a “slow-paced” recovery is possible later this year, “contingent on improved governance and concerted action to resolve structural bottlenecks.” It also said headline inflation is likely to remain “range-bound” around current levels in 2013-2014.

“Policy recalibration could become necessary in either direction as may be considered appropriate” depending on economic risks, the Reserve Bank said.

India’s economy will expand 6 percent in the fiscal year through March 2014, based on a survey of forecasts from other organizations, yesterday’s report showed. The previous survey in January projected 6.5 percent. Wholesale-price inflation may average 6.5 percent, the survey said, compared with an earlier 7 percent estimate.

“The challenge is to counter the growth slowdown by reviving investment while managing the trade-off between objectives of reviving demand and restraining the CAD,” the Reserve Bank said, referring to the trade imbalance.

Manufacturing PMI

A report yesterday signaled Indian manufacturing expanded at a slower pace in April. A purchasing managers’ index from HSBC Holdings Plc and Markit Economics fell to 51 from 52. That’s the slowest since the same reading in November 2011. A number above 50 indicates growth.

In Asia today, China reported non-manufacturing PMI expanded at a slower pace in April. In Australia, producer prices rose at a faster pace last quarter from the previous three-month period.

The European Commission will announce economic growth forecasts while a report may show euro-area producer-price gains slowed in March. The U.S. will release reports on non-farm payrolls and factory orders.

India’s minority government has changed policies since September to tackle price pressures, lure capital inflows and spur economic expansion. The steps included paring the budget deficit and opening the retail and aviation industries to more investment from abroad.

Etihad Airways PJSC agreed last week to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($383 million), taking advantage of the liberalization.

Inflation Risks

Inflation in Asia’s No. 3 economy, as measured by the wholesale-price index, slowed to a 40-month low of 5.96 percent in March, while the consumer-price gauge climbed 10.39 percent from a year earlier.

Higher energy prices as subsidies are curbed, rising food costs and wage pressures are among the inflation risks India continues to face, the monetary authority said.

Imports of gold and oil, and subdued exports, contributed to a current-account shortfall of $32.6 billion in October through December, or a record 6.7 percent of GDP. A drop of about 8 percent in gold prices in April stoked optimism the gap will narrow.

“The recent moderation in commodity prices, including oil and gold” will help reduce the pressure on the current account, the central bank said. Still, it’s “likely to remain above sustainable level,” it said.

Six respondents in the rate survey expect no change in the policy benchmark, while one predicts 7 percent. Nine of 32 economists in another survey are calling for a reduction in the cash reserve ratio to 3.75 percent from 4 percent, with the rest seeing no change.

Gross domestic product rose 5 percent in 2012-2013, the statistics agency estimates. That’s less than the average of about 8 percent in the past decade. The pace will accelerate to 6.1 percent to 6.7 percent this fiscal year, Finance Ministry advisers said in February.

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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