Subbarao Says Policy-Easing Room Is Practically Non-Existent

India’s central bank governor signaled the nation has almost no space left to ease monetary policy further, following the third interest-rate cut this year to bolster a struggling economy.

“Baseline case is that the possibility of easing is practically non-existent,” Duvvuri Subbarao said in a Bloomberg TV India interview in Mumbai on May 4. Any expectation that the central outlook is for “another salvo” of loosening is “inaccurate,” he said, adding inflation and the current-account deficit will determine the path of monetary policy.

Subbarao lowered the repurchase rate to 7.25 percent from 7.50 percent on May 3, the third straight quarter-point cut, extending the only reduction in borrowing costs in major emerging nations in 2013. The Reserve Bank of India is trying to spur investment and consumption to revive an economy that expanded last fiscal year at the weakest pace in a decade.

“The RBI is attempting to anchor market expectations towards a more neutral stance,” said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore. “Monetary easing can’t be the panacea for reviving India’s economic growth, especially when retail inflation is off the charts.”

The yield on the government note maturing June 2022 rose 1 basis point, or 0.01 percentage point, to 7.75 percent as of 11:02 a.m. in Mumbai. The rupee gained 0.1 percent to 53.89 per dollar, while the S&P BSE Sensex index rose 0.4 percent.

Capital Flows

“Extraordinary quantitative easing” in advanced nations has helped to finance the current-account imbalance, Subbarao said. At the same time, any unwinding of money-printing policies, or other shocks to the global economy, may affect capital flows to India, he said.

The current-account gap swelled to $32.6 billion in the quarter ended Dec. 31, or a record 6.7 percent of gross domestic product, stoked by gold and oil imports and subdued exports.

“It’s reasonably probable, if not in 2013, but certainly in 2014,” Subbarao said, referring to the possibility of outflows. “We got to be prepared for it and the way to prepare for it is to reduce the current-account deficit and increase the flow of non-debt-creating, stable capital flows into the economy.”

Inflation based on wholesale prices eased to 5.96 percent in March, a 40-month low. Food costs have a heavier weighting in the consumer gauge, which surged 10.39 percent in the same month from a year earlier.

Need for Vigilance

“Should the upside risk factors to inflation materialize, we’ll have to be vigilant to that and we’ll have to respond to that,” Subbarao said. If the current-account deficit deteriorates “more than we projected in our internal calculations, then we’ll have to react to that,” he said.

“On the other side, should CAD become more benign than we expect, should inflation come down faster than we factored in, should other risk factors, for example, supply constraints in the economy, investment sentiment become more benign, there will certainly be space for easing,” Subbarao said.

The Reserve Bank said after the May 3 policy decision that there is “little space for further monetary easing,” 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.”

Indian gross domestic product rose 5 percent in the year ended March, the least since 2003, according to an estimate from the statistics agency. Moderating investment, an extended fight against inflation and a drop in exports hurt the expansion in Asia’s No. 3 economy.

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