India’s central bank Governor Duvvuri Subbarao signaled inflation risks will limit the extent he can reduce interest rates to bolster an economy expanding at the weakest pace in a decade.
“There is room for monetary easing, but that room is limited and we have to make a careful judgment on how to use that limited room,” he said at a briefing in Moscow, reiterating guidance he gave in January. Subbarao, who spoke on Feb. 16, was attending Group of 20 meetings in the Russian capital.
India last month became the first major Asian nation to cut interest rates this year after benchmark inflation eased, as the central bank moved to back government efforts to boost the economy. The country’s finance minister, who unveils the annual budget on Feb. 28, has vowed spending curbs to help reduce the chance of a resurgence in price pressures.
The improvement in economic growth “is going to be gradual, the improvement will depend on the number of factors, but I believe that largely perhaps, the worst is behind us,” Subbarao said. He estimated economic expansion of 5.5 percent for the 12 months through March 2013, above the Central Statistics Office projection of 5 percent.
The governor said he would assess the quality of the government’s fiscal adjustment. The Reserve Bank in a Jan. 28 report indicated a push to pare the deficit that increasingly relies on sales of shares in state-owned companies and one-off auctions of telecom permits may be unsustainable.
The central bank lowered the repurchase rate to 7.75 percent from 8 percent on Jan. 29. At the same time, Subbarao said that while there’s space to ease monetary policy, “it’s going to be quite limited.”
Among the constraints is a deficit in the current account, the broadest measure of trade, which swelled to a record $22.31 billion in the quarter ended Sept. 30. This fiscal year’s gap will be higher than last year, Subbarao said at the Feb. 16 briefing, adding that the depreciation of the rupee isn’t helping exports in the short term.
The shortfall has weighed on the rupee, which has fallen more than 8.5 percent against the dollar in the past year. The currency declined 0.5 percent to 54.2250 per dollar in Mumbai on Feb. 15, completing its biggest weekly loss since November, as provisional data showed the trade deficit widened in January to a near record.
Prime Minister Manmohan Singh has changed policies since mid-September, seeking to revive investment after corruption allegations against officials and parliamentary gridlock hurt his development agenda.
The steps included opening retail and aviation to more foreign participation, easing caps on capital inflows and setting up a panel to speed up infrastructure projects. The government also partially freed diesel prices from state control last month to limit fuel subsidies.
Finance Minister Palaniappan Chidambaram has vowed to contain the fiscal deficit at 5.3 percent of gross domestic product in 2012-2013 and pare it to 4.8 percent the following year, seeking to lower the odds of a credit-rating downgrade.
Recent reports showed wholesale prices rose 6.62 percent in January from a year earlier, the slowest in 38 months. That pace remains above the central bank’s 5 percent comfort zone.
A separate measure of inflation based on consumer prices reached 10.79 percent in January, one of the highest levels in the Group of 20 major economies.
Increases in coal and electricity prices may add to inflation, Subbarao said at the Moscow briefing.
The economy will expand 5 percent in fiscal year through March 2013, below last year’s 6.2 percent and the least since 4 percent in 2002-2003, the Central Statistical Office estimated Feb. 7.
The International Monetary Fund forecasts 6 percent Indian GDP growth in the 12 months beginning April 2013, compared with an annual average of about 8 percent in the past decade.