India Cuts Rates Third Time to Extend Sole BRIC EasingKartik Goyal
India cut interest rates for a third straight meeting to revive growth, extending the only reduction in borrowing costs among major emerging nations this year.
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, the nation faces a record current-account deficit and consumer-price inflation above 10 percent, with the central bank saying today the room for further policy easing is limited.
“The Reserve Bank is getting close to the end of the easing cycle -- they may yet fire another small salvo over the summer,” said Leif Eskesen, chief economist for India and Southeast Asia at HSBC Holdings Plc in Singapore. “Imbalances reflected in inflation and the elevated current-account deficit need to be settled for monetary policy to be effective.”
The yield on the government note maturing June 2022 rose to 7.75 percent from 7.72 percent yesterday as of 3:56 p.m. in Mumbai. The rupee weakened 0.3 percent to 53.9525 per dollar, while the BSE India Sensitive Index slipped 0.8 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 pressures and a current-account shortfall it described as “by far the biggest risk to the economy.”
Recent monetary policy actions alone can’t revive growth, the Reserve Bank said, adding there needs to be a push to ease supply bottlenecks, improve governance and step up public investment, while maintaining the commitment to fiscal consolidation.
Subbarao said at a briefing in Mumbai that if inflation “recedes further” and the current-account gap moderates more than expected, “space will open up for further monetary-policy easing and we’ll do that.” He added that for now, such space is “limited.”
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.
Finance Minister Palaniappan Chidambaram, speaking at the Asian Development Bank annual meeting near New Delhi today, said he won’t be satisfied until India achieves 8 percent annual expansion again, predicting the nation will grow at that pace in 2015-2016.
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.
India’s rate cuts contrast with decisions to hold or raise policy benchmarks so far in 2013 in Brazil, Russia and China, the other members of the BRIC group of large emerging nations.
A report yesterday signaled Indian manufacturing expanded at a slower pace in April. A purchasing managers’ index from HSBC 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 expanded at a slower pace in April. In Australia, producer prices rose at a faster pace last quarter from the previous three-month period.
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 reducing 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 clouds the nation’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.