India’s central bank left interest rates unchanged and said increases in borrowing costs earlier this month to stem the rupee’s slide will be reversed in a measured way as the currency stabilizes.
GovernorDuvvuri Subbarao kept the benchmark repurchase rate at 7.25 percent, the Reserve Bank of India said today. All except one of 32 analysts in a Bloomberg News survey predicted the decision, with one expecting a cut to 7 percent. The review is the last scheduled before Subbarao’s term ends in September.
Subbarao raised two rates July 15 and has capped cash injections into the banking system and tightened lenders’ reserve ratios to curb the supply of rupees, joining nations from Brazil to Indonesia in fighting currency weakness. Costlier credit could hamper a government push to revitalize investment and revive growth from a decade low, State Bank of India said.
“From a growth-inflation trade-off, the central bank is now more concerned about the macro-financial stability of the economy,” said Samiran Chakraborty, a Mumbai-based economist at Standard Chartered Plc.
The rupee weakened 1.8 percent, the most in more than a month, to 60.485 per dollar at the close in Mumbai. The yield on the 7.16 percent government bond due May 2023 rose to 8.26 percent from 8.13 percent yesterday. The S&P BSE Sensex index slid 1.3 percent.
The rupee, down 12 percent in the past six months, has been hurt by a record current-account deficit and the prospect of reduced U.S. monetary stimulus, which has spurred capital outflows from emerging markets. The central bank’s steps have contributed to a climb of about 1.2 percent in the currency since it touched a record low July 8.
“The recent liquidity tightening measures by the Reserve Bank are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation,” the central bank said in its statement in Mumbai today.
India has had to “forfeit some monetary policy discretion to address external sector concerns,” it said.
The Reserve Bank has reservations about issuing foreign-currency sovereign bonds to garner capital inflows as such debt may compromise financial stability, Subbarao said in a press briefing. At the same time, these matters will be discussed with the government and all options on the table will be considered, he said.
The monetary authority has a sufficient arsenal to contain currency volatility, he said, adding India is fairly resilient and that the nation does not need an International Monetary Fund loan.
Interest rates will “come down in future but not until such time as volatility in exchange rates is contained,” the governor said.
Subbarao this month increased the marginal standing facility rate and the bank rate by 200 basis points to 10.25 percent. That contrasts with 25 basis-point repurchase rate cuts in January, March and May each to spur growth. The marginal standing facility and bank rates were held today.
Without the risks stemming from the trade imbalance and rupee weakness, India’s current situation would have provided “a reasonable case for continuing on the easing stance,” the Reserve Bank said.
The central bank estimated gross domestic product may expand 5.5 percent in the fiscal year through March 2014, compared with an earlier projection of 5.7 percent. Wholesale-price inflation is largely moving in line with a prior forecast of about 5.5 percent for the period, it said.
The Reserve Bank said it will seek to “condition the evolution of inflation” to 5 percent by March 2014.
The biggest risk to the economic outlook “stems from the external sector” and a current-account gap that remains above the sustainable level of 2.5 percent of GDP, the Reserve Bank added. The shortfall was 4.8 percent of GDP in 2012-2013.
Prime Minister Manmohan Singh’s government has raised taxes on gold imports to try and curb the deficit. It has also eased restrictions on foreign investment in a bid to woo inflows and revive growth.
The current-account gap will narrow significantly this year and the administration is looking at more steps to attract stable financing for the imbalance, the Finance Ministry’s Chief Economic Adviser Raghuram Rajan said in New Delhi today.
Currency depreciation threatens to raise costs for Indian companies facing at least $20 billion in overseas debt repayments in the coming year. The Reserve Bank’s foreign reserves slid to $279.2 billion by July 19 from about $295 billion at the start of 2013, indicating dollar sales to support the rupee.
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