India’s Rate Cuts Blunted Adds Reserve-Ratio Pressure: Economy

The Reserve Bank of India faces pressure to cut lenders’ reserve requirements as banks struggle to woo deposits and resist passing on interest-rate reductions.

Governor Duvvuri Subbarao will lower the repurchase rate for a third time this year to 7.25 percent from 7.5 percent on May 3, according to 22 of 26 analysts in a Bloomberg News survey. One predicts 7 percent and the rest no change. Five of 24 in another survey expect a cash-reserve-ratio cut to 3.75 percent from 4 percent, with the rest forecasting no change.

Lenders from State Bank of India to ICICI Bank Ltd., facing close to the weakest deposit growth in a decade, have lowered borrowing costs as little as 0.25 percentage point since April last year. The central bank cut the policy benchmark a full point from 8.5 percent in the same period, and JPMorgan Chase & Co. said wider steps may be needed to spur cheaper credit.

“If the Reserve Bank of India is serious about more broad-based monetary transmission, it will need to cut lenders’ reserve requirements or pick up the pace of bond purchases to inject liquidity,” said Sajjid Chinoy, an economist at JPMorgan Chase in Mumbai. “Barring this, rate cuts will continue to be symbolic.”

The yield on the government note maturing June 2022 has slid to 7.73 percent from 7.90 percent since the last rate cut on March 19, on bets another reduction is probable to fight the weakest economic growth since 2003. The rupee has strengthened 1.1 percent versus the dollar this year, while the BSE India Sensitive Index has dropped 0.4 percent.

Deposit Growth

Asian stocks rose with gold today on optimism central banks will maintain loose monetary policies to boost economic growth, with the MSCI Asia Pacific Index Excluding Japan extending the biggest weekly gain in three months.

The region’s recovery may require further support from some policy makers. Growth in Chinese industrial companies’ profits slowed in March, a report showed on April 27. Still, the mainland’s imports and exports are expected to grow at a faster pace this year, barring any big changes in the external environment, the Ministry of Commerce said in a trade report posted yesterday.

India’s deposit growth averaged 13.8 percent this year, Reserve Bank figures show, near December’s 11 percent that was the least since 2003, according to Bank of America Merrill Lynch.

Consumer Prices

Consumer-price inflation exceeding 10 percent is driving savers to gold and real estate instead, said Rupe Rege Nitsure, chief economist at Bank of Baroda. Another measure of inflation, based on wholesale prices, eased to a 40-month low of 5.96 percent in March.

Food inflation remains high, driving a wedge between the two gauges and adding to the challenge of monetary management, the central bank said in March’s policy statement.

The scope for further easing is “quite limited,” the Reserve Bank said, citing risks including a record current-account deficit of 6.7 percent of gross domestic product in the quarter ended Dec. 31.

A drop in gold prices this month and a rebound in exports since February have stoked optimism the gap will narrow. Imports of the precious metal account for more than two-thirds of the current-account deficit, according to the central bank.

India’s minority government has changed policies since September to tackle inflation, revive investment and spur economic expansion. The steps included paring the budget deficit and opening the retail and aviation industries to more investment from abroad.

Jet Deal

Etihad Airways PJSC agreed last week to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($379 million), taking advantage of the liberalization.

India has also eased caps on foreign investment in the bond market to lure capital inflows.

Other proposed reforms, such as allowing greater overseas involvement in the insurance and pensions industries, need parliamentary approval.

The legislature has been disrupted repeatedly by opposition protests over graft scandals, hurting Prime Minister Manmohan Singh’s policy agenda.

Subbarao cut the repurchase rate a quarter point in both January and March. He lowered the cash reserve ratio to 4 percent in January from 4.25 percent.

GDP rose 5 percent in the year ended March 2013, according to an estimate from the statistics agency. That’s less than the average of about 8 percent in the past decade. Growth will accelerate to 6.1 percent to 6.7 percent this fiscal year, Finance Ministry advisers said in February.

‘Real Solution’

“In a situation when inflation is largely driven by food prices and monetary transmission remains weak, monetary policy will not have a sustainable impact,” said Nitsure. “The real solution lies in addressing structural problems -- easing food supplies, resolving infrastructure bottlenecks and expediting reforms.”

India’s plight contrasts with economies elsewhere in Asia, where a recovery in growth has lured capital inflows as the world’s most developed nations ease monetary policy.

Asian policy makers must be ready to respond “early and decisively” to overheating risks stemming from rapid credit growth and rising asset prices, the International Monetary Fund said today.

Elsewhere in Asia, South Korea reported a current-account surplus of $4.98 billion in March. In Europe, inflation reports are due for Germany and Spain. A U.S. report may show household purchases were little changed in March following a 0.7 percent gain in February, according to a Bloomberg News survey.

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