Chidambaram Sees No Shift in RBI Stance After Rate Increases

The Reserve Bank of India’s recent move to raise two interest rates while keeping the benchmark repurchase rate unchanged doesn’t signal a shift toward a tightening bias, Finance Minister Palaniappan Chidambaram said.

“What I think the central bank did a few days ago is not to be understood as affecting the policy rate one way or another,” Chidambaram said in a July 20 interview in Moscow, where he attended a meeting of Group of 20 finance ministers and central bankers. “That decision will be taken separately.”

Governor Duvvuri Subbarao, who has one monetary-policy review left before his term expires in September, is under pressure to contain inflation and stem a plunge in the rupee that has boosted import costs. He will leave the repurchase rate unchanged on July 30 for a second meeting, after three cuts earlier in 2013 to fight the weakest economic growth in a decade, all 16 analysts said in a Bloomberg News survey.

“The central bank has no space to change the repurchase rate this fiscal year,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “We remain negative on India over the next six to nine months because of deteriorating external finances, a weak currency and worsening growth.”

Subbarao increased the bank rate and the marginal standing facility rate on July 15 and capped daily fund injections via repo contracts, after the rupee sank to a record-low 61.2125 per dollar on July 8. The currency has dropped about 7.5 percent this year and was the world’s worst performer in June.

Rupee Pressure

The rupee weakened 0.1 percent to 59.405 as of 10:24 a.m. in Mumbai. The S&P BSE Sensex index rose 0.2 percent. The yield on the 8.15 percent note due June 2022 advanced to 8.10 percent from 8.07 percent on July 19.

Goldman Sachs Group Inc. and Nomura say the probability of the central bank raising rates would increase if the measures taken by the RBI fail to stem the rupee’s drop.

The increase in the two non-benchmark rates led some economists to warn of tightened liquidity conditions at a time of lackluster growth. The government has changed policies since September to try to boost expansion and avert a credit-rating downgrade before a general election due by May 2014.

“We think there’s a good chance we can grow close to 6 percent,” Chidambaram said. “Basically next only to China, India is the largest growing economy.”

Asia’s No. 3 economy expanded 5 percent last fiscal year, the weakest pace since 2003, and below the 10-year average of about 8 percent. It will probably grow 6.1 percent to 6.7 percent in the year through March 2014, according to a survey by India’s Finance Ministry in February.

Inflation Quickens

Consumer-price inflation was 9.87 percent in June. Wholesale inflation reached a three-month high of 4.86 percent.

Subbarao lowered the repurchase rate in January, March and May by 25 basis points each to 7.25 percent.

The government’s reforms included looser foreign investment rules in the aviation and retail businesses. It has also eased caps and levies on purchases of local bonds by investors abroad. Restrictions in other industries are also set to be eased.

“We expect that inflows will resume,” Chidambaram said.

When asked about the government’s plans to consider issuing debt abroad or selling bonds to non-resident Indians, Chidambaram said “our options are on the table, no decision has been taken.”

Trade Imbalance

ArcelorMittal and Posco last week scrapped $12 billion of proposed steel projects because of delays in getting land and permits, dealing a blow to India’s efforts to woo investment to help finance a record current-account shortfall.

The imbalance in the broadest measure of trade has weighed on the rupee. The prospect of reduced U.S. monetary stimulus has also eroded demand for assets in emerging markets from Brazil to India.

Chidambaram said he didn’t think the Food Security Bill enacted earlier this month will “adversely” affect the fiscal deficit.

“When the budget is made for the next year or the years after, this expenditure will be taken into account and the budget will be drawn up accordingly,” he said.

Under the food bill, 67 percent of India’s 1.2 billion people may be entitled to buy wheat, rice and coarse grains at subsidized rates. The plan involves estimated spending of 1.25 trillion rupees ($21 billion) in a full financial year at current prices.

“I think the fiscal deficit consolidation plan is a well laid-out plan and we do not intend to breach the red lines in that plan,” Chidambaram said.

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