India Raises Rates, Signals End of Monetary Tightening Cycle
Oct. 25 (Bloomberg) -- India raised interest rates for a 13th time since the start of 2010 and signaled it's nearing the end of its record cycle of increases as the economy cools. Bonds rallied the most this year.
"The likelihood of a rate action in the December mid- quarter review is relatively low," the Reserve Bank of India said in a statement in Mumbai today after it boosted the repurchase rate to 8.5 percent from 8.25 percent. Eighteen of 28 economists in a Bloomberg News survey predicted the decision and the rest forecast no change.
Governor Duvvuri Subbarao may hold off on further monetary tightening after Brazil and Russia lowered borrowing costs in recent weeks and China kept rates unchanged since July amid Europe's debt crisis and a faltering U.S. recovery. The Reserve Bank today cut India's growth estimate to 7.6 percent from 8 percent for the current fiscal year and reiterated inflation would slow to 7 percent by March 31.
"The damage that rate increases are starting to inflict on the economy is getting larger," said Sanjay Mathur, Singapore- based head of research and strategy for non-Japan Asia at Royal Bank of Scotland Group Plc. "It's now time to assess the impact of the previous rate hikes on the economy and that's a very appropriate stance."
The yield on the 7.80 percent government note due 2021 dropped 12 basis points, or 0.12 percentage point, to 8.69 percent as of 11:30 a.m. in Mumbai. That is the lowest level since Oct. 5 and the biggest decline since Dec. 7, according to data compiled by Bloomberg. One-year interest-rate swaps slid the most this month as traders pared bets for rate increases.
The Reserve Bank also decided to deregulate the savings bank deposit rate, granting lenders the ability to set their own interest rates on deposits with immediate effect. Still, banks will have to offer a uniform rate on deposits up to 100,000 rupees irrespective of the amount in the account, the RBI said in its monetary policy review.
"Growth is showing clear signs of slowing and the global turmoil is becoming a risk," Rupa Rege Nitsure, a Mumbai-based economist at the state-owned Bank of Baroda, said before the decision. "The policy objective can't be to kill growth with too much tightening while trying to tame inflation."
Subbarao has increased the central bank's benchmark rate by 375 basis points since mid-March 2010, the fastest round of increases since the central bank was established in 1935, Bloomberg data show.
That's curbing consumer demand. Manufacturing in India grew in September at the slowest pace in 2 1/2 years, according to the Purchasing Managers' Index released by HSBC Holdings Plc and Markit Economics.
India's automakers on Oct. 10 cut their car sales growth forecast for a second time this year as companies including Honda Motor Co. and Ford Motor Co. faced lower demand.
Officials from China to South Korea have refrained from raising rates in recent weeks to gauge whether slowing economic growth will dissipate price pressures. In Brazil, the central bank opted to lower its target Selic rate this month, the second cut in less than two months.
Subbarao said Oct. 12 that inflation must cool before India's central bank can start easing monetary policy. The Reserve Bank's next policy review is due Dec. 16.
India's benchmark wholesale-price inflation was 9.72 percent in September, staying above 9 percent since the start of December. By comparison, consumer prices rose 7.3 percent in Brazil, 6.1 percent in China and 7.2 percent in Russia.
"The rupee's decline is making imports costlier," and may add to price pressure, Suresh M. Hegde, Mumbai-based head of finance at Videocon Industries Ltd., an Indian maker of washing machines and air conditioners, said in an Oct. 19 interview. "We have no option but to pass on this burden to consumers." He didn't elaborate.
The rupee's drop is in line with other emerging-market currencies and "with falling global commodity prices partly offset by rupee depreciation, the risks to inflation projections are now balanced," the central bank said in a report yesterday.
Inflation will start to fall from December and ease to 7 percent by March before moderating further in the first half of the new fiscal year starting April 1, the central bank said today. Beyond December, "if the inflation trajectory conforms to projections, further rate hikes may not be warranted," the bank said.
Even so, the central bank said the government's "large" budget deficit has been an "important source" of demand pressure. "Clearly, the impact of tightening monetary policy has been diluted by the expansionary fiscal position, which is a sub-optimal outcome," the central bank said.
"Rate increases have not had the desired impact on inflation as fiscal policy stays loose," Amol Agrawal, a Mumbai-based economist at STCI Primary Dealer Ltd., said before the decision. "Monetary policy alone can't curb price gains. The government needs to cut its budget deficit too."
India's budget shortfall may widen to as much as 5.5 percent of gross domestic product in the year ending March 31, more than the government's 4.6 percent target, because of higher spending on fuel and food subsidies, Agrawal said.
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