India Rate Decision-Day Guide: Looking for Space to Ease Again

  • All economists see rates unchanged, hope for forward guidance
  • Rajan's view expected on wage increases, risks to inflation

Two months ago, Indian central bank Governor Raghuram Rajan lowered interest rates more than estimated and said he used up all the space to ease. Now analysts are scrutinizing the economy for any more room to lower borrowing costs.

It won’t be easy to find. Pressure from food costs pushed up consumer-price gains to 5 percent in October, matching Rajan’s target for March 2017. A proposed pay increase for government staff threatens to derail plans to narrow the fiscal deficit, and measures to simplify tax and bankruptcy laws are still stuck in parliament.

So it’s no surprise that all 47 economists surveyed by Bloomberg expect Rajan to leave the benchmark repurchase rate at 6.75 percent on Tuesday, after four cuts in 2015. A separate survey of economists predicted he’d be on hold until 2017 even while swaps signal the possibility of a reduction next year.

Here’s what to look for in the policy statement, which will be released at 11 a.m. in Mumbai. Rajan typically holds a press briefing immediately afterward.

Forward Guidance

In previous statements, Rajan has made a laundry list of conditions for more rate cuts. He refrained from doing so in September, when he qualified the central bank’s stance as “accommodative to the extent possible” and said he would work with the government on removing hurdles for banks to pass on lower rates.

“The first thing we will watch out for is whether the RBI sets the stage for further easing by stating a list of preconditions which could guide the markets better,” Samiran Chakraborty and Anurag Jha,  Mumbai-based economists at Citigroup Inc., wrote in a research note. About half of Rajan’s 125 basis points in cuts have been passed on by lenders, they said.

Inflation, Salaries

The central bank has warned that inflation would accelerate from September as supportive base effects wane. Economists are waiting to see how worried Rajan is about the surge in lentils, known locally as pulses, after he expressed concern last month about the effect food prices can have on wages. That assessment may also impact whether he’s on track to hit his inflation targets.

A proposed 24 percent salary increase for government employees is clouding the outlook further. Among recommendations is a 138 percent increase in the house rent allowance, which could add as much as 1 percentage point to inflation if implemented, according to economists at HSBC Holdings Plc.

Adding to uncertainties, the U.S. Federal Reserve may raise interest rates this month for the first time since 2006, triggering even more capital outflows. Any weakening in the rupee -- already Asia’s worst performer over the past month -- risks boosting India’s import bill and widening its deficits.

India’s True Strength

Analysts outside of India may wonder why it needs more monetary support. The country’s economy expanded 7.4 percent in the quarter through September, while China grew 6.9 percent -- the slowest pace since 2009. Brazil is forecast to contract 4.2 percent.

The headline growth figure masks underlying weaknesses. Exports have fallen for 11 straight months and credit growth is hovering near a 20-year low. The main concern for India is the lack of investment, Rajan said Nov. 20, contrasting weak rural demand hurt by two years of below-average rainfall with a revival in urban consumption.

“India is one of the few emerging-market economies to have completed the painful macro adjustment process -- it is now on the path of recovery,” Morgan Stanley economists led by Chetan Ahya wrote in a Nov. 29 report. “However, the continued weakness in external demand and slowdown in rural consumption spending are holding back the pace of recovery.”

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