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India Trade Deficit Contributed to Measured Easing, Patel Says

India has taken a measured approach to easing monetary policy partly because of a record current-account deficit, according to Reserve Bank of India Deputy Governor Urjit Patel.

“Given that there is a current-account deficit issue, we’ve followed a calibrated approach,” Patel told investors in New York at a meeting yesterday. “We’ve been complementary to the government’s effort to bring the fiscal deficit under control.”

Patel is traveling in the U.S. with Finance Minister Palaniappan Chidambaram as India strives to lure capital inflows to fund the current-account gap. The shortfall and lingering price pressures have restricted the central bank to a reduction of 50 basis points in interest rates in 2013. The monetary authority has also cut reserve requirements at banks.

“There’s one instrument or one-and-a-half instruments and several objectives, that’s the balancing act we have to do,” said Patel, who became one of four deputy governors in January.

Governor Duvvuri Subbarao lowered the repurchase rate by 25 basis points each in January and March, to 7.5 percent. He also cut the cash reserve ratio in January to 4 percent from 4.25 percent.

Wholesale-price inflation eased to a 40-month low of 5.96 percent in March. Another index, based on consumer prices, climbed more than 10 percent last month from a year earlier.

The moderation in headline and core inflation on some measures has fed into the calibrated easing of monetary policy, Patel said.

Rate Outlook

Twelve of 13 analysts in a Bloomberg News survey predict a cut in borrowing costs to 7.25 percent at the review due May 3. One sees no change.

India’s gross domestic product rose 5 percent in the year ended March, the slowest pace in a decade, according to an estimate from the nation’s statistics agency.

A moderation in exports and investment has hampered the economy. The current-account deficit swelled to $32.6 billion in the quarter ended Dec. 31, equivalent to 6.7 percent of GDP, according to the Reserve Bank.

The gap could ease to 2.5 percent of GDP in one to two years if exports advance and oil prices remain contained, Chidambaram told reporters in New York.

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