India Leaves Rates Unchanged on Inflation Concerns
July 28 (Bloomberg) -- India's central bank kept borrowing costs unchanged, signaling an end to its deepest round of interest-rate cuts on concern that inflation will "creep up" from October.
The Reserve Bank of India held its reverse repurchase rate at 3.25 percent, according to a statement in Mumbai today. The central bank raised its inflation forecast for the year to March 31 to around 5 percent from an April estimate of 4 percent and said it may soon need to "reverse" the loose monetary policy of the past ten months.
Inflation risks increased after Finance Minister Pranab Mukherjee this month unveiled plans to raise spending and widen the budget deficit to a 16-year high to bolster growth. Policy makers from Tokyo to London, who in some cases cut interest rates to close to zero, have started to discuss when they will exit from the emergency measures employed to ease a global credit freeze.
"Central banks need to put in place now a timely, smooth and systematic exit from the monetary easing," said Siddhartha Sanyal, an economist at Edelweiss Capital Ltd. in Mumbai. "For India, it would be difficult to continue pursuing the current low-rate regime beyond six to nine months."
Governor Duvvuri Subbarao said the central bank will maintain an "accommodative monetary stance" until there are "definite and robust" signs of recovery.
Policy Reversal
"This accommodative monetary stance is, however, not the steady state stance," he said in today's statement. "On the way forward, the Reserve Bank will have to reverse the expansionary measures to subdue inflationary pressures while preserving the growth momentum."
Stocks narrowed losses after the central bank decision, which was expected by 20 of 23 economists in a Bloomberg News survey. The Sensitive stock index fell 0.4 percent to 15,312.63 on the Bombay Stock Exchange at 11:20 a.m. The benchmark 10-year government bond yields rose 1 basis point to 6.96 percent while the rupee was little changed at 48.225 against the dollar.
India, which releases 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 that price gains are gathering pace.
Consumer price indexes that measure the cost of living for industrial and farm workers were running at between 7 percent and 10 percent in May, driven 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."
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 in the year to March 2010.
The central bank today estimated policy measures since September including lower interest rates and a reduced cash reserve ratio were worth 6 trillion rupees. It said a prolonged budget deficit can "crowd out" private investments and trigger inflation, and urged the government to lay out a roadmap to trim the budget shortfall, including details on revenue and expenditure targets.
Growth Forecast
The "immediate challenge" before the central bank is to provide ample cash in the banking system for companies and government borrowings to support growth, while at the same time control the "potential build-up of inflationary pressures on the way forward," Subbarao said in today's statement.
Inflation is showing signs of picking up elsewhere, with China's central bank today forecasting price gains to rebound in the second half of the year. The Organization for Economic Cooperation and Development expects U.K. inflation will be the highest among Group of Seven nations next year.
Subbarao today also raised the central bank's growth forecast for India in the year to March 2010 to 6 percent "with an upward bias" from the 6 percent estimated in April because of favorable funding conditions for companies and a revival in industrial production.
He said an "uptrend in growth momentum" is unlikely before September and that less-than-adequate monsoonal rainfall could reduce farm output. The rains, which start in June and last until September, were 17 percent deficient as of July 24.
India's $1.2 trillion economy, Asia's third largest, expanded 6.7 percent in the year ended March 31, the weakest pace since 2003.
Reliance Industries Ltd., India's most valuable company, on July 24 reported an 11 percent fall in net income in the three months to June 30 as the global recession curbed fuel demand.
Subbarao also backed Mukherjee's goal to boost growth to a 9 percent pace each year and sustain that momentum to cut poverty in the South Asian nation.
"The clear message seems to be that growth will be the main priority," said Finance Secretary Ashok Chawla. "But they're also going to watch how inflation plays out."
To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net
July 28 (Bloomberg) -- India's central bank kept borrowing costs unchanged, signaling an end to its deepest round of interest-rate cuts on concern that inflation will "creep up" from October.
The Reserve Bank of India held its reverse repurchase rate at 3.25 percent, according to a statement in Mumbai today. The central bank raised its inflation forecast for the year to March 31 to around 5 percent from an April estimate of 4 percent and said it may soon need to "reverse" the loose monetary policy of the past ten months.
Inflation risks increased after Finance Minister Pranab Mukherjee this month unveiled plans to raise spending and widen the budget deficit to a 16-year high to bolster growth. Policy makers from Tokyo to London, who in some cases cut interest rates to close to zero, have started to discuss when they will exit from the emergency measures employed to ease a global credit freeze.
"Central banks need to put in place now a timely, smooth and systematic exit from the monetary easing," said Siddhartha Sanyal, an economist at Edelweiss Capital Ltd. in Mumbai. "For India, it would be difficult to continue pursuing the current low-rate regime beyond six to nine months."
Governor Duvvuri Subbarao said the central bank will maintain an "accommodative monetary stance" until there are "definite and robust" signs of recovery.
Policy Reversal
"This accommodative monetary stance is, however, not the steady state stance," he said in today's statement. "On the way forward, the Reserve Bank will have to reverse the expansionary measures to subdue inflationary pressures while preserving the growth momentum."
Stocks narrowed losses after the central bank decision, which was expected by 20 of 23 economists in a Bloomberg News survey. The Sensitive stock index fell 0.4 percent to 15,312.63 on the Bombay Stock Exchange at 11:20 a.m. The benchmark 10-year government bond yields rose 1 basis point to 6.96 percent while the rupee was little changed at 48.225 against the dollar.
India, which releases 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 that price gains are gathering pace.
Consumer price indexes that measure the cost of living for industrial and farm workers were running at between 7 percent and 10 percent in May, driven 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."
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 in the year to March 2010.
The central bank today estimated policy measures since September including lower interest rates and a reduced cash reserve ratio were worth 6 trillion rupees. It said a prolonged budget deficit can "crowd out" private investments and trigger inflation, and urged the government to lay out a roadmap to trim the budget shortfall, including details on revenue and expenditure targets.
Growth Forecast
The "immediate challenge" before the central bank is to provide ample cash in the banking system for companies and government borrowings to support growth, while at the same time control the "potential build-up of inflationary pressures on the way forward," Subbarao said in today's statement.
Inflation is showing signs of picking up elsewhere, with China's central bank today forecasting price gains to rebound in the second half of the year. The Organization for Economic Cooperation and Development expects U.K. inflation will be the highest among Group of Seven nations next year.
Subbarao today also raised the central bank's growth forecast for India in the year to March 2010 to 6 percent "with an upward bias" from the 6 percent estimated in April because of favorable funding conditions for companies and a revival in industrial production.
He said an "uptrend in growth momentum" is unlikely before September and that less-than-adequate monsoonal rainfall could reduce farm output. The rains, which start in June and last until September, were 17 percent deficient as of July 24.
India's $1.2 trillion economy, Asia's third largest, expanded 6.7 percent in the year ended March 31, the weakest pace since 2003.
Reliance Industries Ltd., India's most valuable company, on July 24 reported an 11 percent fall in net income in the three months to June 30 as the global recession curbed fuel demand.
Subbarao also backed Mukherjee's goal to boost growth to a 9 percent pace each year and sustain that momentum to cut poverty in the South Asian nation.
"The clear message seems to be that growth will be the main priority," said Finance Secretary Ashok Chawla. "But they're also going to watch how inflation plays out."
To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net
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