India Cuts Rates Third Time to Extend Sole BRIC Easing
Governor Duvvuri Subbarao lowered the repurchase rate to 7.25 percent from 7.50 percent, the Reserve Bank of India said in Mumbai today, as 33 of 40 analysts in a Bloomberg News survey predicted. One forecast 7 percent and the rest no change after quarter-point reductions in both January and March.
Subbarao stepped up efforts to spur investment and consumption after India’s weakest expansion in a decade led to the slowest rise in wholesale prices in 40 months in March. At the same time, a record current-account deficit and consumer- price inflation above 10 percent are among risks that constrain room for further policy easing, the central bank said today.
“The RBI can’t do more than small doses of rate cuts due to high retail inflation and the current-account deficit,” said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “Rate cuts are not the answer to resolve growth problems. The push has to come from the government by cutting wasteful expenditure and improving infrastructure bottlenecks.”
The yield on the government note maturing June 2022 rose to 7.77 percent from 7.72 percent yesterday as of 1:53 p.m. in Mumbai. The rupee weakened 0.2 percent to 53.945 per dollar, while the BSE India Sensitive Index slipped 0.6 percent.
“The balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing,” the central bank said, citing the possibility of a resurgence in inflation (INFINFY) pressures and a current-account shortfall it described as “by far the biggest risk to the economy.”
Monetary policy alone can’t revive growth, the Reserve Bank said, adding there needs to be a push to ease supply bottlenecks, improve governance, step up public investment and maintain the commitment to fiscal consolidation.
Gross domestic product may expand 5.7 percent in the fiscal year through March 2014, compared with the baseline projection of 5.5 percent for the previous 12 months, the central bank said. Wholesale inflation will probably be “range-bound” at around 5.5 percent in 2013-2014, it said.
Inflation based on wholesale prices eased to 5.96 percent in March from a year earlier. The Reserve Bank said it will seek to “condition the evolution of inflation” to 5 percent by the same month next year. Food costs have a heavier weighting in the consumer gauge, which surged 10.39 percent in March.
The Reserve Bank also proposed today to reduce the proportion of bonds Indian banks are permitted to hold in the so-called held-to-maturity category to 23 percent from 25 percent. The move may reduce some of the incentive for banks to hold government notes, boosting funds for lending, according to ICICI Securities Primary Dealership Ltd.
A report yesterday signaled Indian manufacturing expanded at a slower pace in April. A purchasing managers’ index from HSBC Holdings Plc and Markit Economics fell to 51 from 52. That’s the slowest since the same reading in November 2011. A number above 50 indicates growth.
The European Central Bank cut borrowing costs to a record- low 0.5 percent yesterday to fight the euro-region’s recession. The U.S. Federal Reserve said this week it will keep buying bonds at a monthly pace of $85 billion, as Chairman Ben S. Bernanke presses on with his effort to boost employment.
In Asia today, China reported non-manufacturing PMI (CPMINMAN) expanded at a slower pace in April. In Australia, producer prices rose at a faster pace last quarter from the previous three-month period.
The European Commission will announce economic growth forecasts while a report may show euro-area producer-price gains slowed in March. The U.S. will release reports on non-farm payrolls and factory orders.
Subbarao has loosened policy even as rising food prices fan one of the fastest consumer inflation rates in the Group of 20 major economies, according to data compiled by Bloomberg.
The central bank faces a “difficult situation” as it has little control over food prices in Asia’s No. 3 economy, said N. R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi.
Imports of gold contributed to a current-account shortfall of $32.6 billion in October through December, or 6.7 percent of GDP. A drop of about 8 percent in the metal’s price in April stoked optimism the gap will narrow.
Monetary policy will have to “remain alert to the risks on account of the CAD and its financing, which could warrant a swift reversal of the policy stance,” the central bank said.
India’s minority government has changed policies since September to spur expansion and avert a credit-rating downgrade.
The steps included trimming the budget shortfall, opening the retail and aviation industries to more investment from abroad and slashing a levy on foreign investors in local bonds.
Indian GDP rose 5 percent last fiscal year, the least since 2003, as expenditure to add factories and infrastructure moderated and exports waned, statistics agency data shows. The World Bank projects a 6.1 percent climb in 2013-2014.
Unilever said this week it plans to spend up to 292 billion rupees ($5.4 billion) on lifting its stake in its Indian unit, wagering the spending power of 1.2 billion people will revive.
Political risk also clouds India’s prospects ahead of elections due by May 2014. Opposition protests over graft scandals have repeatedly disrupted parliament.
“The government has to resolve the infrastructure bottlenecks, ease supplies and improve governance to put India back on the high growth path,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
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