India Growth Rebound Faces Inflation Crimping Rate Cuts: Economy

Indian economic growth may rebound in 2013 while falling short of the government’s 8 percent target, as inflation risks limit the extent interest rates can be lowered to spur consumption and investment.

Gross domestic product in Asia’s No. 3 economy will rise 6.5 percent in the year through March 2014, according to the median of 30 estimates in a Bloomberg News survey. That compares with a 10-year average of 7.8 percent and the Finance Ministry’s projection of 5.7 percent to 5.9 percent in 2012-2013.

Prime Minister Manmohan Singh revived stalled policy overhauls in September to stem a slowdown in expansion, steps that helped send stocks to a two-year high this week on bets that a recovery has begun. While inflation eased to a three-year low of 7.18 percent in December, it remains the fastest among the biggest emerging markets. A record current-account gap is threatening to damp the rupee, adding to price pressures.

“The recovery is going to be a bit slow,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai, who has covered the Indian economy for a decade. “Sentiment has picked up in the financial markets, but things have yet to pick up in the real economy.”

The BSE India Sensitive Index fell 0.2 percent as of 11:34 a.m. in Mumbai, after reaching the highest level since January 2011 yesterday. The rupee, down 6.2 percent against the dollar in the past 12 months, weakened 0.3 percent to 54.805. The yield on the 8.15 percent bonds due June 2022 climbed to 7.87 percent from 7.83 percent yesterday.

Ratings Risk

India’s current-account deficit swelled to $22.31 billion in the quarter ended Sept. 30, and the rupee’s decline against the dollar in the past three months makes it the worst performer after the yen among 11 Asian currencies tracked by Bloomberg.

The Reserve Bank of India will probably limit its rate cut at the Jan. 29 review to a 25 basis-point reduction in the repurchase rate to 7.75 percent, 13 of 16 analysts said in a Bloomberg News survey. The rest expect a cut to 7.5 percent. Fifteen of 21 economists in another survey see the rate ending the second quarter at 7.5 percent or higher.

Inflation remains “quite high” even after easing from a peak and economic growth remains a concern, Reserve Bank of India Governor Duvvuri Subbarao said yesterday. The scope for both monetary and fiscal stimulus is limited, he said.

Singh has opened industries including retail and aviation to more overseas investment since September, set up a panel to speed up infrastructure projects and delayed tax changes that threatened to deter inflows.

BRIC’s Widest

His government last month set a target of 8 percent annual expansion in the five fiscal years through March 2017, lowering an earlier goal of 8.2 percent.

The Finance Ministry has pledged to reduce India’s budget shortfall, the widest in the BRIC group of major emerging nations that also includes Brazil, Russia and China.

Standard & Poor’s and Fitch Ratings warned last year that they may strip India of its investment-grade credit rating, which would hurt the country’s ability to raise funds.

“There are emerging signs that growth has bottomed out in India, though the cyclical upturn will lack momentum in the absence of structural improvements,” said Radhika Rao, a Singapore-based economist at Forecast Pte. There is an “urgent need to address the fiscal and current-account deficits, which pose substantial risks to long-term growth and macroeconomic stability,” she said.

Renewed Pressures

India’s financial system has been made vulnerable by a deterioration in bank assets and a lack of capital as the economy slowed, according to the International Monetary Fund. The main near-term risks to the financial system are a worsening of bank asset quality and renewed pressures on systemic liquidity, even as stress tests have shown the risks are “manageable” for now, it said in a statement this week.

India’s potential growth rate may have fallen to about 7 percent, the Reserve Bank said last month, compared with 8.5 percent before the onset of the global financial crisis. China’s GDP has climbed an average annual 10.6 percent in the past 10 years.

“The realization over the past two years is that India is probably not going to be the next China,” said Glenn Levine, an economist at Moody’s Analytics in Sydney, who has covered the Indian economy for four years. “It does require a concerted and sustained reform and pro-business policy from the government, and there is little evidence based on the past five years that they are able to implement such a policy.”

Decade Low

Foreign-direct investment fell 42 percent to $14.8 billion in the seven months through October compared with a year earlier. Still, offshore funds poured a net $24.5 billion into domestic shares last year, as the policy push since September encouraged bets that the worst of India’s slowdown has passed.

The Finance Ministry’s projected expansion of as little as 5.7 percent in the 12 months to March 31 would be the weakest in a decade. More than two-thirds of India’s 1.2 billion people live on less than $2 per day, according to the World Bank, adding pressure for faster growth.

Elsewhere in Asia, Japan’s machinery orders rose more than expected in November, suggesting that companies are optimistic about the economic outlook. China’s foreign direct investment declined for the first full year since 2009 as economic growth slowed and manufacturers relocated to markets with cheaper labor.

A release on euro-area inflation today may show that consumer-price growth held at 2.2 percent in December, the same level as in November.

In the U.S., a report may show consumer prices were unchanged in December from the previous month. Industrial production rose 0.3 percent in December after a 1.1 percent gain the previous month, the best back-to-back readings in a year, according to a Bloomberg survey.

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