India unexpectedly left interest rates unchanged as the fastest inflation among the biggest emerging markets narrows scope to bolster an economy struggling with trade and budget deficits and Europe’s debt turmoil.
Governor Duvvuri Subbarao left the benchmark repurchase rate at 8 percent, the Reserve Bank of India said in a statement in Mumbai today. Only four of 25 economists in a Bloomberg News survey predicted the outcome, with 19 expecting a 0.25 percentage-point cut and the remainder a half-point reduction.
Hours after the decision, Fitch Ratings cut India’s sovereign credit outlook to negative, joining Standard & Poor’s in signaling the country is at risk of losing its investment grade rating on concern growth will deteriorate. Subbarao’s room to counter the weakest Indian economic expansion in almost a decade is being limited in part by a plunge in the rupee, which has stoked an inflation rate already above 7 percent.
“Re-accelerating inflation, a still fragile rupee and the continued lack of action from New Delhi are limiting the RBI’s room for easing,” said Richard Iley, the Hong Kong-based chief economist for Asia at BNP Paribas SA. “Reform, not stimulus, is required to reboot India’s disappointing macro-economic performance.”
The rupee dropped 0.9 percent to 55.96 against the dollar as of 4:33 p.m. in Mumbai, while the BSE India Sensitive Index extended its decline, sliding 1.4 percent. The currency has tumbled about 20 percent in the past year. The yield on the 8.15 percent bond due June 2022 rose 12 basis points, or 0.12 percentage point, to 8.17 percent from 8.05 percent on Friday.
Today’s central bank decision contrasts with rate cuts in Brazil and China in the past three weeks as the impact of Europe’s turmoil fans through Asia and dominates the agenda of a Group of 20 summit starting in Mexico today.
Fitch cited the heightened risk of a deterioration in growth potential and limited progress on paring the nation’s budget deficit for lowering the rating outlook from stable. It affirmed its sovereign rating for India at BBB-, the lowest investment grade level. S&P warned on June 11 that it may cut India’s rating after lowering the outlook to negative in April.
“While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent with sustainable growth,” the Reserve Bank said today. “Importantly, retail inflation is also on an uptrend.”
The Reserve Bank said “future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks,” adding it “stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments” amid global risks.
Indian Prime Minister Manmohan Singh is grappling with an economy set back by trade and budget deficits, corruption scandals and infighting in the ruling coalition that has stymied his efforts to lure more foreign investment to ease bottlenecks.
Gross domestic product rose 5.3 percent in the three months through March from a year earlier, the least since 2003, imperiling the prime minister’s goal of 9 percent annual gains to cut poverty.
India’s benchmark wholesale inflation accelerated to 7.55 percent in May, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China. The government’s projected fiscal deficit of 5.1 percent of GDP in the year through March 2013 is the group’s widest.
Another report today showed Indian consumer prices rose 10.36 percent in May from a year earlier.
“We’ll have a combination of weak growth and still-high inflation for longer,” said Rajeev Malik, a senior economist at CLSA Asia-Pacific Markets in Singapore. “The political will to implement solutions is still missing.”
New Zealand, Hong Kong
Elsewhere in the Asia-Pacific region, New Zealand’s consumer confidence fell to the lowest level in five quarters as budget cutbacks and the risk of slowing global growth made households apprehensive about future income, a private survey showed. An index of sentiment fell to 99.9 in the second quarter from 102.4 in the first three months of the year, Westpac Banking Corp. and McDermott Miller Ltd. said.
A Hong Kong report showed the island’s May unemployment rate at 3.2 percent. Sri Lanka said its GDP growth slowed to 7.9 percent last quarter, a two-year low.
Asian stocks rose today after the outcome of Greek elections eased concern that the nation may exit the euro. The MSCI Asia Pacific Index climbed 1.4 percent as of 8:12 p.m. in Tokyo.
The Reserve Bank of India lowered rates on April 17 for the first time since 2009, to 8 percent from 8.5 percent. It said at the time the weaker rupee, energy costs and India’s fiscal deficit posed inflationary risks that my limit room for further cuts.
The central bank in January and March reduced the amount lenders need to set aside as reserves by a combined 125 basis points, to 4.75 percent, to ease cash shortages at banks.
“Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly investment, with the role of interest rates being relatively small,” the Reserve Bank said today. “Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.”
To boost credit flow to exporters, the monetary authority said today it has increased the eligible limit of the export credit refinance facility to 50 percent from 15 percent, starting the fortnight of June 30. This will provide additional funds of over 300 billion rupees to banks, it said.
The Indian government’s recent setbacks include the suspension in December of plans to allow foreign companies such as Wal-Mart Stores Inc. to open supermarkets after a coalition ally objected.
Growth in Asia’s third-largest economy has also slowed after Subbarao raised rates by a record 3.75 percentage points from March 2010 to October 2011 to try and contain inflation.
Singh vowed on June 6 to revitalize growth outlining projects including new ports, roads and power plants. The impending resignation of Finance Minister Pranab Mukherjee to contest India’s presidential poll may prompt a cabinet overhaul that also seeks to shore up investor sentiment.
Singh is joining world leaders at the G-20 summit today and tomorrow, beginning a week of crisis meetings taking place after Spain this month became the fourth euro-region nation to seek a bailout amid the weakest global economy since the 2009 recession.
Some companies in India have felt the impact of a moderating economy that is being squeezed by price pressures. Car sales fell in May at Maruti Suzuki India Ltd., and the Indian units of Ford Motor Co. and General Motors Co., after a rise in gasoline tariffs.
The nation’s “mix of growth and inflation is expected to remain challenging,” said Singapore-based Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. The temptation to address the situation with rate cuts is “dangerous,” she said.