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India’s Growth De-Rated as Rupee Constrains Subbarao: Economy

Indian ten-rupee banknotes are arranged for a photograph in New Delhi, India. Photographer: Prashanth Vishwanathan/Bloomberg
Indian ten-rupee banknotes are arranged for a photograph in New Delhi, India. Photographer: Prashanth Vishwanathan/Bloomberg

May 25 (Bloomberg) -- India’s central bank chief pledged to take steps as needed to curb swings in the rupee as the currency’s slump threatens to stoke inflation and limit scope for interest-rate cuts.

“We will do whatever is necessary, consistent with our policy,” Governor Duvvuri Subbarao said late yesterday in Mussoorie, in north India. “We have taken action to improve the current flows, encourage inflows and also to curb speculation.”

The rupee’s 19 percent slump against the dollar in the past year, driven in part by the failure of Prime Minister Manmohan Singh to liberalize investment rules, adds pressures to an inflation rate already the highest among BRIC nations. The Reserve Bank of India will probably be unable to lower borrowing costs until October-to-December, Goldman Sachs Group Inc. said today as it downgraded its growth forecast for the country.

“The RBI has limited room to prop up the rupee,” said Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt. “The ball is in the government’s court. They need to act at a swift pace and give a positive signal to foreign investors about commitment to pending economic reforms. That will reverse the tide.”

India’s currency reached a record low of 56.3875 per dollar yesterday, before recouping some losses to close at 55.655. Its tumble in the past 12 months is the worst in a basket of 11 major Asian currencies tracked by Bloomberg. The BSE India Sensitive Index ended 1.7 percent higher. The yield on the 8.79 percent bonds due November 2021 fell one basis point, or 0.01 percentage point, to 8.5 percent.

Conserve the Reserves

With Greece’s election still weeks away and the risks of an escalation in Europe’s woes difficult to assess, the RBI may be wary in drawing down India’s reserves to support the rupee. The nation had $258 billion of foreign-exchange holdings as of May 11, down about $26 billion from the end of October, according to data compiled by Bloomberg.

“Intervention is increasingly becoming counter-productive as it is only breeding questions about adequacy of foreign-exchange reserves,” Indranil Sen Gupta, an economist at Bank of America Merrill Lynch in Mumbai, wrote in a note to clients yesterday.

As one response, India may issue a foreign-currency denominated bond of about $20 billion, Sen Gupta said. Barclays Plc analysts today also predicted a possible sale of dollar-denominated securities for non-resident Indian investors, perhaps through the State Bank of India.

No Dollar Bond

Even so, Subbarao said India isn’t contemplating selling sovereign bonds abroad. The Reserve Bank is continuously monitoring the exchange rate, he told reporters after attending a board meeting of the central bank.

Elsewhere in Asia, Japan today reported that core consumer prices, which exclude fresh food, rose 0.2 percent in April from a year earlier, showing the Bank of Japan remains distant from its 1 percent inflation target after years of falling prices. Singapore may announce that industrial output grew 4.1 percent in April from a year before, according to the median estimate in a Bloomberg News survey of economists.

In Europe, German consumer confidence for June as measured by the GfK survey is forecast to be unchanged at 5.6, according to the median estimate. French consumer confidence in May is also forecast to remain the same, a separate survey showed. Italy may say retail sales fell in March from the previous month.

In the U.S., a report due later today may show the Thomson Reuters/University of Michigan consumer confidence gauge was unchanged in May from a preliminary reading of 77.8, the highest level since January 2008, economists said.

Inflation Challenge

Goldman revised its forecast for India’s wholesale inflation gauge to a 6.5 percent gain for the fiscal year that began April 1, from 5 percent previously, citing higher food and fuel costs. Tushar Poddar, a Goldman economist in Mumbai, wrote in a note to clients that the RBI will now likely lower interest rates by half a percentage point in the final three months of 2012, compared with the 75 basis points previously seen.

India’s gross domestic product will increase 6.6 percent this fiscal year, down from 7.2 percent previously predicted, according to Goldman. Rohini Malkani, an economist at Citigroup Inc. in Mumbai, said in a note yesterday “there is now near-consensus that the India story has de-rated, with growth at best likely in the 6.5 percent to 7 percent range” this year.

India reports first-quarter GDP figures next week, forecast to show a year-on-year increase of 6 percent, according to the median estimate in a Bloomberg News survey.

Return to Risk

The rupee has also been hurt by a record trade deficit and reduced demand for emerging-market assets as Europe’s debt crisis dims the global outlook. Goldman predicts a rebound in coming months as risk appetite returns.

The currency’s slide may increase the cost of imports such as oil and stoke inflation, a risk underscored by Indian refiners’ decision to boost petrol prices yesterday.

India’s central bank this month stepped up the fight to steady the rupee. It curbed trading in currency derivatives to rein in volatility and moved to boost the supply of dollars by cutting the amount of overseas income companies can hold in foreign currency to 50 percent from 100 percent.

Officials have also raised interest rates on non-rupee deposits by as much as 300 basis points and freed up borrowing costs on foreign-exchange loans to exporters.

Gasoline Prices

State-run refiners including Indian Oil Corp. increased gasoline prices by 11 percent to 73.18 rupees ($1.31) a liter in New Delhi yesterday. Diesel, kerosene and cooking gas prices were left unchanged.

Subbarao said the central bank won’t rule out the possibility of selling dollars directly to oil refiners. India imports about 80 percent of its crude oil needs.

In March this year, he said the Reserve Bank of India only intervenes in the foreign-exchange market to curb swings in the rupee and prevent disruption to macroeconomic stability.

The governor yesterday reiterated the central bank’s stance that it will consider inflation and economic growth data before deciding on interest rates at the June 18 policy meeting.

The central bank lowered borrowing costs last month for the first time since 2009, by 50 basis points to 8 percent, to bolster spending at home. It also flagged price pressures from the fiscal deficit, energy costs and the weaker rupee.

Indian inflation quickened to 7.23 percent in April. That’s the fastest pace among the so-called BRIC group of biggest emerging markets that also includes Brazil, Russia and China.

While the headline gauge “surprised on the upside” last month, core inflation remains below 5 percent, Subbarao said.

Asia’s third-largest economy probably expanded 6.7 percent in the year through March 2012, less than the 8.4 percent pace recorded in each of the previous two fiscal years, according to the median estimate in a Bloomberg News survey.

Faltering efforts to liberalize the economy, uncertainty over tax changes and the highest BRIC fiscal deficit have damaged sentiment, deterring investment from abroad. Standard & Poor’s cut India’s credit outlook to negative from stable last month, putting at risk its investment grade status.

To contact the reporters on this story: Tushar Dhara in New Delhi at; Kartik Goyal in New Delhi at

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

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