Indian Prime Minister Manmohan Singh’s economic advisory body cut its growth forecast and signaled interest rates wouldn’t fall until the rupee stabilizes and inflation eases. Bonds, the currency and stocks fell.
Asia’s third-biggest economy may expand 5.3 percent in the year to March 2014 from an earlier estimate of 6.4 percent, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in a twice-yearly report released today. That compares with a 5 percent growth rate last year and an average expansion of 8 percent over the past decade.
“The current stance of monetary policy has to continue until stability in the rupee is achieved,” Rangarajan said, adding that the timeframe for that remained unclear. “Thereafter, if the current trend in the moderation of wholesale price inflation continues, which is in fact expected, the monetary authority can switch to a policy of easing.”
The rupee has performed worse than most Asian currencies this year as slowing growth and a record current-account deficit hurt confidence in an economy with 1.2 billion people. Governor Raghuram Rajan, who reviews interest rates for the first time next week, is under pressure to support the currency and avoid a surge in import costs that would fuel price pressures.
“India is likely to see a protracted slow growth recovery this year,” said Tirthankar Patnaik, a strategist at Religare Capital Markets Ltd. in Mumbai. “Odds are stacked against Rajan lowering the rates.”
India and Indonesia have the highest policy rate among Asia’s biggest economies at 7.25 percent, according to data compiled by Bloomberg. The central bank has cut the repurchase rate three times this year to revive flagging growth.
The rupee weakened 0.3 percent to 63.7050 per dollar at 12:30 p.m. in Mumbai. The S&P BSE Sensex index of stocks fell 0.4 percent. The yield on the benchmark 7.16 percent government bond due May 2023 jumped seven basis points, or 0.07 percentage point, to 8.57 percent.
“The rupee at the current level is well corrected,” Rangarajan said in the report, without specifying a number. “Stability is returning to the foreign-exchange market. As capital flows return and as current-account deficit begins to fall, this tendency will strengthen.”
Concerns over inflation, the rupee’s fall and industrial output that dipped in May and June prompted Standard Chartered Plc last month to cut India’s economic growth forecast to 4.7 percent from 5.5 percent in the fiscal year ending March 2014. CLSA Asia Pacific Markets now expects a 4.2 percent expansion, down from 5.2 percent, while DBS Bank sees 4.3 percent growth.
India’s industrial production unexpectedly rose 2.6 percent in July from a year earlier, a government report showed yesterday. Consumer prices rose 9.52 percent in August from a year earlier, according to another report released yesterday.
“It’s a good number but nowhere does it indicate a strong revival in the weak growth story,” said Anubhuti Sahay, an economist at Standard Chartered in Mumbai, referring to the jump in factory output. The central bank will remain focused on containing the rupee volatility and keep rates on hold in the next policy meeting, she said.
The central bank’s key goal is containing inflation expectations, Rajan told reporters on Sept. 4 when he took over as the Reserve Bank of India’s 23rd governor. India can fix its growth slowdown and financial woes with “modest reforms” and achieve economic growth of between 5 percent and 5.5 percent this year, Rajan said in a commentary published on Sept. 11.
“This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade,” Rajan wrote in Project Syndicate. “But India does not need to become a manufacturing giant overnight to fix its current problems.”
India’s trade deficit narrowed in August as exports grew 13 percent in the month from a year ago, while imports fell 0.7 percent, the commerce ministry said Sept. 10.
The rupee sank to an all-time low 68.845 per dollar on Aug. 28, hurt by the possibility of reduced U.S. monetary stimulus and a current-account deficit that reached a record during the last fiscal year. It has pared some of those losses after Rajan announced concessional swaps for banks’ foreign-currency deposits, and U.S. jobs data prompted speculation the Federal Reserve may be less aggressive in cutting stimulus.
India may have to use $9 billion from foreign exchange reserves to finance the current-account deficit, Rangarajan said in the report.
Wholesale-price inflation probably accelerated 5.70 percent in August, compared with 5.79 percent in July, according to the median estimate in another Bloomberg survey, before data due Sept. 16.
Indian companies have been buffeted by climbing costs and faltering growth, forcing them to raise prices. JSW Steel Ltd., Jindal Steel & Power Ltd. and others said they will increase prices by as much as 7 percent this month as the rupee’s decline inflates costs of raw materials purchased overseas.
Rajan will make his interest rate decision on Sept. 20, two days after the U.S. Federal Reserve holds a meeting. He inherited an economy that expanded 4.4 percent last quarter from a year earlier, the weakest pace since 2009, as investment fell and consumer spending in the nation of 1.2 billion people moderated.
The central bank raised two interest rates in July to help stem the rupee’s slide against the dollar. Nations from Brazil to Indonesia have also boosted borrowing costs to aid currencies, as the prospect of reduced Federal Reserve monetary stimulus saps demand for assets in emerging markets.
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