Reserve Bank of India Governor Duvvuri Subbarao said the slowest inflation since 2009 will be factored into monetary policy decisions next month. Benchmark bond yields dropped to a three-year low and stocks surged.
“We certainly will take note of the softening of inflation and the external payments situation in the next mid-quarter policy statement on June 17,” Subbarao said at an event in Frankfurt yesterday. He was “happy to see” official data that showed Indian inflation at a 41-month low in April, he said.
The yield on the 8.15 percent note maturing in June 2022 slid 5 basis points, or 0.05 percentage point, to 7.42 percent as of 12:05 p.m. in Mumbai. That is its lowest level since May 2010. The benchmark S&P BSE Sensex index climbed as much as 2.1 percent, the biggest intraday gain in a month.
Subbarao is battling a record current-account deficit and the threat of a resurgence in price pressures even as he seeks to revive the $1.8 trillion economy expanding at the slowest pace in a decade. Any room to cut interest rates further is “practically non-existent,” he signaled this month, after reducing borrowing costs three times this year.
The commerce ministry reported yesterday that the wholesale-price index rose 4.89 percent in April, the least since November 2009. Data this week also showed consumer prices rose 9.39 percent from a year earlier in the same month, which Subbarao said is “still high.” The RBI imposed curbs on some gold imports by banks on May 13 after data showed inbound shipments of the yellow metal widened the trade deficit to a three-month high in April.
India’s central bank this month lowered the repurchase rate to 7.25 percent from 7.5 percent, a third straight quarter-point cut. The current-account shortfall is “by far the biggest risk to the economy,” it said, after the gap swelled to $32.6 billion in the quarter ended Dec. 31, a record 6.7 percent of gross domestic product.
GDP rose 5 percent in the year ended March, the smallest gain since 2003, according to an initial estimate from the government.
“Easing price pressures and weak growth will allow the RBI to continue with its calibrated easing,” said Tirthankar Patnaik, a Mumbai-based strategist at Religare Capital Markets Ltd. The central bank may cut its repo rate by another 75 basis points by March 31, he said.
Prime Minister Manmohan Singh’s minority government has changed policies since September last year to spur growth and avert a credit-rating downgrade. The steps included trimming the budget deficit, opening the retail and aviation industries to more investment from abroad and reducing a levy on foreign investors in local bonds.