India Holds Rates as Rupee Drop Risks Fueling Inflation

India left interest rates unchanged after a plunge in the rupee to a record low threatened to stoke inflation in Asia’s third-largest economy.

Governor Duvvuri Subbarao kept the repurchase rate at 7.25 percent, the Reserve Bank of India said in Mumbai today. Fifteen of 25 analysts in a Bloomberg News survey predicted the decision. Ten called for a fourth straight cut of 25 basis points.

The rupee’s fall of about 6 percent versus the dollar this quarter is the steepest in Asia and may fan import costs in a country with the second-highest consumer inflation in the Group of 20 nations. The currency has been hurt by an unprecedented current-account deficit, with data today showing the merchandise trade shortfall exceeded $20 billion in May on gold imports.

“The tumble in the rupee could upset the easing inflation trajectory and add to concerns about financing of the current-account deficit,” said Radhika Rao, an economist at DBS Group Holdings Ltd. in Singapore. “The central bank is clearly worried about maintaining economic stability at this moment.”

The rupee fell 0.1 percent to 57.6012 per dollar as of 1:19 p.m. in Mumbai. It touched an all-time low of 58.985 on June 11. The yield on the 8.15 percent bond due June 2022 fell to 7.47 percent from 7.53 percent on June 14. The S&P BSE Sensex index advanced 0.4 percent.

Stocks and currencies have slid in nations from Brazil to the Philippines on concern the U.S. could pare monetary stimulus if its jobs market shows sustained improvement.

RBI Guidance

India’s monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the Reserve Bank said, adding it stands ready to “respond rapidly and appropriately to any adverse developments.”

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” the monetary authority said. “While several measures have been taken to contain the current-account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows.”

Subbarao has previously said that the current-account gap is the biggest risk in an economy hurt by moderating investment.

He lowered borrowing costs in January, March and May. Gross domestic product rose a decade-low 5 percent last fiscal year.

India’s wholesale-price index increased 4.7 percent in May from a year earlier, a 43-month low. At the same time, a separate consumer inflation gauge climbed 9.31 percent.

‘Upside’ Pressures

The central bank today flagged “upside” price pressures including rupee weakness and food costs. At the same time, it said the progress of the monsoon, which is pivotal for agriculture, augurs well for economic prospects.

Finance Minister Palaniappan Chidambaram signaled last week that more caps on foreign-direct investment may soon be eased, as he tries to extend a nine-month government drive to revitalize the economy and avert a credit-rating downgrade.

He’s striving to woo funds to finance the current-account gap, which swelled to 6.7 percent of GDP in the last quarter of 2012, fanned by gold and oil imports.

Inward shipments of gold and silver jumped almost 90 percent to $8.39 billion in May from a year earlier after the yellow metal’s price slid in April, data from Director General of Foreign Trade Anup Pujari showed today.

Overall Indian exports slid 1.1 percent to $24.51 billion, while imports advanced 7 percent to $44.65 billion, leaving a deficit of $20.1 billion.

Prime Minister Manmohan Singh began policy changes in September. The steps included paring the budget deficit, easing rules in the retail and aviation industries to lure overseas capital and speeding up approvals for infrastructure projects.

Fitch Ratings revised India’s credit-outlook to stable from negative on June 12, providing some succor for Singh, whose coalition has faced graft scandals as well as depressed growth.

Domestic sales in India’s passenger-car industry, which includes companies such as Maruti Suzuki India Ltd., fell 12.3 percent in May from a year earlier, in a sign of subdued demand.

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