India Holds Interest Rate as Subbarao Signals Easing to Come

RBI Governor Duvvuri Subbarao
Reserve Bank of India (RBI) Governor Duvvuri Subbarao. Photographer: Adeel Halim/Bloomberg

India’s central bank left interest rates unchanged for a fifth meeting while signaling it could act in coming months, as the fastest inflation among BRIC nations limits scope for monetary easing sought by the government.

Reserve Bank of India Governor Duvvuri Subbarao kept the repurchase rate at 8 percent, according to a statement in Mumbai today. The decision was predicted by 25 of 27 economists in a Bloomberg News survey, with two expecting a reduction. The central bank also held the cash reserve ratio for lenders at 4.25 percent after a cut in October.

“The inflation situation is still not benign to allow the central bank to cut rates,” said Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai. “Rate cuts will be influenced by inflation coming down on a sustained basis and the government translating its intent of cutting the deficit and implementing reforms into concrete action.”

Subbarao has so far withstood calls from Finance Minister Palaniappan Chidambaram for lower rates to bolster an economy forecast by the government to expand the least in a decade this fiscal year. As Prime Minister Manmohan Singh steps up a policy overhaul to revive growth hurt by the country’s budget deficit and infrastructure bottlenecks, the central bank said today monetary policy has to “respond to the threats to growth from this point onwards.”

Gearing Up

“The RBI danced to its own tune and kept policy rates on hold in light of the persistence of inflation,” Leif Eskesen, Singapore-based chief India and Southeast Asia economist for HSBC Holdings Plc, said in a research note after the decision. “However, it is gearing up for potential policy rate cuts early next year, assuming inflation risks recede and policy progress on other fronts is sufficient.”

Indian stocks advanced as the central bank hinted at monetary easing in the coming months. The BSE India Sensitive Index gained 0.6 percent as of 2:51 p.m. in Mumbai, reversing a decline of as much as 0.5 percent earlier. The yield on the 8.15 percent government bond due June 2022 rose to 8.17 percent, while the rupee fell 0.2 percent to 54.9375 per dollar.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth,” the central bank said.

Forecast Cut

Stocks and the rupee fell yesterday after the Finance Ministry cut its forecast for India’s growth to about 5.7 percent to 5.9 percent in the year through March from an earlier estimate of as much as 7.85 percent. That would be the smallest gain since the year ended March 31, 2003, when gross domestic product grew 4 percent.

The RBI on Oct. 30 cut its projection for economic growth to 5.8 percent from 6.5 percent and raised its inflation forecast to 7.5 percent by March 2013 from 7 percent.

The central bank has “some incentive to seek growth in the country,” Raghuram Rajan, chief economic adviser in the Finance Ministry, told reporters in New Delhi today. “It is good they see the possibility of cutting interest rates going forward.”

The government, striving to avert a credit-rating downgrade, snapped months of policy paralysis in September by opening the nation’s retail industry to overseas retailers such as Wal-Mart Stores Inc. and curbed energy subsidies. More recently, it also set up a panel to accelerate infrastructure projects and approved changes to a century-old land law to help curb often violent protests that have delayed projects.

‘Investor Confidence’

“Both fiscal and monetary policies, however, would need to be supportive to sustain investor confidence,” the Finance Ministry said yesterday. A moderation in inflation that may commence in the January-to-March quarter and benign global commodity prices will “facilitate softening of the monetary policy stance of the RBI,” it said.

India’s inflation rate remains the fastest among the BRIC group of emerging nations that also includes Brazil, Russia and China. The country’s benchmark wholesale-price gauge slowed to 7.24 percent in November. Consumer prices climbed 9.9 percent last month.

Consumer-price inflation “increased in November, reflecting sustained food inflation pressures,” according to the RBI statement. Still “the decline in core inflation has been comforting.”

Trade Deficit

India’s economy expanded 5.3 percent in the three months ended Sept. 30 from a year earlier, slowing to match a three-year low. The country’s trade deficit held near the widest in more than 18 years in November as exports fell for a seventh month.

Local passenger car sales by companies such as Maruti Suzuki India Ltd. fell 8.3 percent in November from a year earlier, according to Society of Indian Automobile Manufacturers data. Foreign direct investment fell 60 percent in the five months through August compared with a year earlier.

“India is faced with a very difficult situation with high inflation and deficits and sub-par growth,” said Arun Singh, an economist at Dun & Bradstreet Information Services India Pvt. in Mumbai. “There is a real threat of ratings downgrade and the need of the hour is to implement economic reforms swiftly.”

Finance Minister Chidambaram has called for cheaper credit to back the government push to spur growth, and pledged on Oct. 29 to contain the budget deficit as officials sought to increase scope for a rate cut. He said after the RBI held rates in October that “growth is as much a challenge as inflation.”

“Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter,” the central bank said today. “Liquidity conditions will be managed with a view to supporting growth, thereby preparing the ground for further shifting the policy stance to support growth.”

Still, risks to inflation persist and the central bank will remain “sensitive” to them even as the policy emphasis shifts toward growth, it said.

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