Subbarao Says RBI Budget-Deficit Estimate Will Shape Policy

India’s Central Bank Expects Inflation to Ease, Subbarao Says
The central bank left borrowing costs unchanged last month for a third meeting to damp an inflation rate above 7 percent, while reducing bank reserve ratios to support a recent push by the government to revive growth. Photographer: Kuni Takahashi/Bloomberg

The Reserve Bank of India is to make a projection of India’s probable budget deficit this fiscal year that will shape monetary policy, Governor Duvvuri Subbarao said.

“It is not yet clear what the final fiscal deficit number for this year is going to be,” Subbarao said in response to questions at a briefing in India’s southern state of Puducherry today. “We have to make a determination in the next few weeks on what the final outcome might be and that will determine, among other things, our monetary policy calibration.”

The central bank left interest rates unchanged last month for a third meeting to fight price increases and has previously signaled that curbing the budget gap would help damp inflation. The government unveiled a 14 percent diesel-price rise on Sept. 13 to pare spending on fuel subsidies, the first step of a policy overhaul to restore confidence after the economy faltered.

“Containing fiscal slippage is very important for the RBI’s monetary policy decision and it would watch for more measures or a road map to manage the fiscal situation,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai.

The rupee has appreciated about 7 percent versus the dollar since the government began the policy revamp, paring its drop in the past 12 months to 4.6 percent. It strengthened 0.8 percent today to 51.745 per dollar, while the BSE India Sensitive Index climbed 1 percent. The yield on the 10-year bonds due June 2022 was little changed at 8.15 percent.

Policy Stance

Headline inflation accelerated to 7.55 percent in August, the fastest pace in the BRIC group of largest emerging nations, which also includes Brazil, Russia and China. That exceeds a comfort level that the Reserve Bank has said may be about 5 percent.

Ahead of the central bank’s next policy review on Oct. 30, Subbarao said “the effort will be to rein in inflation but support growth to the extent possible.”

The monetary authority left its benchmark repurchase rate at 8 percent on Sept. 17. It reduced the cash reserve ratio to 4.5 percent, the lowest level since 2004, from 4.75 percent.

India’s budget deficit is the widest among major emerging nations as slower growth hurts tax receipts and subsidies fan spending, imperiling the government’s goal of narrowing the gap to 5.1 percent of gross domestic product in the year through March 2013, from 5.8 percent.

The shortfall may widen to 6.1 percent of GDP this fiscal year if no action is taken to tackle it, a panel set up by Finance Minister Palaniappan Chidambaram said in a report dated Sept. 3 and released last week.

Inflation Estimate

The rupee’s longer-term decline and the possibility that a weak monsoon may stoke food costs by crimping farm output are among other inflation risks, according to the central bank.

The monetary authority remains focused on inflation and plans to review its estimate for the financial year through March at its next policy meeting, Deputy Governor Subir Gokarn told reporters in Chennai yesterday. It predicts 7 percent inflation by the end of March 2013.

Prime Minister Manmohan Singh’s administration opened the retail, aviation, broadcast and power industries to more foreign investment the day after announcing the diesel-price increase, the first in more than a year.

The cabinet today approved proposals to permit more foreign participation in the pensions and insurance industries, plans that need parliamentary approval.

The policy revamp has ended months of gridlock over how to fight the weakest Indian growth since the 2009 global recession.

Retail Investment

The government’s decision to allow foreign investment in supermarket chains will benefit producers and buyers and create more jobs, Subbarao said yesterday.

“It will help consumers, in the sense that they will get better quality, presumably at low prices,” he said, adding he expects price pressures in India to ease.

Indian GDP may rise 5.6 percent in the year through March 2013, the weakest pace in a decade, according to a forecast from the Asian Development Bank.

Standard & Poor’s and Fitch Ratings reduced the outlook on India’s credit rating to negative from stable earlier this year, bringing the nation a step closer to junk status.

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