India May Signal End to Sharpest Round of Rate Cuts
July 28 (Bloomberg) -- India's central bank may signal that its sharpest round of interest-rate cuts has come to an end by keeping borrowing costs unchanged at a meeting today.
The Reserve Bank of India will hold its reverse repurchase rate at 3.25 percent, according to 20 of 23 economists in a Bloomberg News survey. The central bank, which cut borrowing costs six times between October and its last quarterly meeting in April, will release its decision at 11:15 a.m. in Mumbai.
Governor Duvvuri Subbarao is preparing the ground to gradually tighten monetary policy as consumer demand and investments revive. Inflation risks have increased after Finance Minister Pranab Mukherjee this month announced plans to raise spending and widen the budget deficit to a 16-year high to shield India from the worst global recession since World War II.
"We see monetary policy moving to a neutral phase before tightening begins," said Mridul Saggar, chief economist at Kotak Securities Ltd. in Mumbai. "Inflation may be at 8 percent by March," double the central bank's forecast made in April, Saggar said.
India, which announces final inflation numbers after a two- month lag, raised its estimate for the benchmark wholesale price index in the week ended May 16 to 1.65 percent from 0.61 percent, indicating the gathering pace of price gains.
Consumer price indexes that measure the cost of living for industrial and farm workers were also running at between 7 percent and 10 percent in May, stoked by high food costs.
'Danger Zone'
"The continuation of the monetary-fiscal stimuli is now hitting the danger zone," S. S. Tarapore, a former deputy governor of the central bank, said in Mumbai on July 16. "Given the budget is strongly expansionary, the RBI has little option but to gradually withdraw the monetary accommodation."
The yield on India's benchmark 10-year bond, which has risen 1.65 percentage points this year, was unchanged at 6.91 percent in the past week.
Mukherjee on July 6 announced plans to borrow a record 4.51 trillion rupees ($94 billion) to fund spending on roads, power and aid for the poor. The budget shortfall is forecast at 6.8 percent of GDP.
Prior to the budget, the central bank estimated its policy measures, along with increased government spending and tax cuts, was worth as much as $85 billion, or almost 7 percent of GDP.
Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc., said the challenge facing Subbarao is to boost demand in the "near term" while containing inflationary pressures in the "medium term."
Monsoon Rains
"In the din created in the name of growth, the RBI has to realize that if inflation accelerates, the blame will rest squarely on it," Tarapore said. "The RBI should give a warning storm signal that inflation will pick up in the foreseeable future."
Subbarao may revise the central bank's inflation and growth forecast by taking into account higher energy prices and less- than-adequate monsoonal rainfall, which could reduce farm output and increase food costs. The rains, which start in June and last until September, were 17 percent deficient as of July 24.
In April, Subbarao forecast inflation at 4 percent and growth at 6 percent by the end of March 31. The economy grew 6.7 percent in the year ended March 31, the weakest since 2003.
Central banks from Tokyo to London have stopped cutting rates as evidence is mounting that the world's biggest economies are emerging from recession and inflation is showing signs of accelerating.
OECD Forecasts
The Organization for Economic Cooperation and Development said June 24 that GDP in its 30 industrialized member countries will increase 0.7 percent next year after shrinking 4.1 percent in 2009. The U.K. inflation rate will be the highest in the G-7 next year, OECD said.
Mukherjee wants to boost growth to a 9 percent pace and sustain that momentum to cut poverty in the South Asian nation. The minister said July 14 that the monetary and fiscal stimulus have shown positive results, though the economy is still "not out of the woods."
Reliance Industries Ltd., India's most valuable company, yesterday reported an 11 percent fall in net income in the three months to June 30 as the global recession curbed fuel demand. Tata Motors Ltd., which began selling the world's cheapest car this month, unexpectedly reported a jump in profit after a change in accounting rules.
Saumitra Chaudhuri, a member of the planning agency that sets India's development agenda, said formulating monetary policy for the next three to six months will be difficult, as it will be hard to decide when rates should be increased.
"Demand isn't so strong. Inflation has picked up a head of steam -- though it's not alarming, it certainly can't be ignored," said Chaudhuri, a former adviser to Prime Minister Manmohan Singh. "Still, at this point to try and switch to a tighter policy may not be prudent." To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net
July 28 (Bloomberg) -- India's central bank may signal that its sharpest round of interest-rate cuts has come to an end by keeping borrowing costs unchanged at a meeting today.
The Reserve Bank of India will hold its reverse repurchase rate at 3.25 percent, according to 20 of 23 economists in a Bloomberg News survey. The central bank, which cut borrowing costs six times between October and its last quarterly meeting in April, will release its decision at 11:15 a.m. in Mumbai.
Governor Duvvuri Subbarao is preparing the ground to gradually tighten monetary policy as consumer demand and investments revive. Inflation risks have increased after Finance Minister Pranab Mukherjee this month announced plans to raise spending and widen the budget deficit to a 16-year high to shield India from the worst global recession since World War II.
"We see monetary policy moving to a neutral phase before tightening begins," said Mridul Saggar, chief economist at Kotak Securities Ltd. in Mumbai. "Inflation may be at 8 percent by March," double the central bank's forecast made in April, Saggar said.
India, which announces final inflation numbers after a two- month lag, raised its estimate for the benchmark wholesale price index in the week ended May 16 to 1.65 percent from 0.61 percent, indicating the gathering pace of price gains.
Consumer price indexes that measure the cost of living for industrial and farm workers were also running at between 7 percent and 10 percent in May, stoked by high food costs.
'Danger Zone'
"The continuation of the monetary-fiscal stimuli is now hitting the danger zone," S. S. Tarapore, a former deputy governor of the central bank, said in Mumbai on July 16. "Given the budget is strongly expansionary, the RBI has little option but to gradually withdraw the monetary accommodation."
The yield on India's benchmark 10-year bond, which has risen 1.65 percentage points this year, was unchanged at 6.91 percent in the past week.
Mukherjee on July 6 announced plans to borrow a record 4.51 trillion rupees ($94 billion) to fund spending on roads, power and aid for the poor. The budget shortfall is forecast at 6.8 percent of GDP.
Prior to the budget, the central bank estimated its policy measures, along with increased government spending and tax cuts, was worth as much as $85 billion, or almost 7 percent of GDP.
Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc., said the challenge facing Subbarao is to boost demand in the "near term" while containing inflationary pressures in the "medium term."
Monsoon Rains
"In the din created in the name of growth, the RBI has to realize that if inflation accelerates, the blame will rest squarely on it," Tarapore said. "The RBI should give a warning storm signal that inflation will pick up in the foreseeable future."
Subbarao may revise the central bank's inflation and growth forecast by taking into account higher energy prices and less- than-adequate monsoonal rainfall, which could reduce farm output and increase food costs. The rains, which start in June and last until September, were 17 percent deficient as of July 24.
In April, Subbarao forecast inflation at 4 percent and growth at 6 percent by the end of March 31. The economy grew 6.7 percent in the year ended March 31, the weakest since 2003.
Central banks from Tokyo to London have stopped cutting rates as evidence is mounting that the world's biggest economies are emerging from recession and inflation is showing signs of accelerating.
OECD Forecasts
The Organization for Economic Cooperation and Development said June 24 that GDP in its 30 industrialized member countries will increase 0.7 percent next year after shrinking 4.1 percent in 2009. The U.K. inflation rate will be the highest in the G-7 next year, OECD said.
Mukherjee wants to boost growth to a 9 percent pace and sustain that momentum to cut poverty in the South Asian nation. The minister said July 14 that the monetary and fiscal stimulus have shown positive results, though the economy is still "not out of the woods."
Reliance Industries Ltd., India's most valuable company, yesterday reported an 11 percent fall in net income in the three months to June 30 as the global recession curbed fuel demand. Tata Motors Ltd., which began selling the world's cheapest car this month, unexpectedly reported a jump in profit after a change in accounting rules.
Saumitra Chaudhuri, a member of the planning agency that sets India's development agenda, said formulating monetary policy for the next three to six months will be difficult, as it will be hard to decide when rates should be increased.
"Demand isn't so strong. Inflation has picked up a head of steam -- though it's not alarming, it certainly can't be ignored," said Chaudhuri, a former adviser to Prime Minister Manmohan Singh. "Still, at this point to try and switch to a tighter policy may not be prudent." To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net
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