Indian central bank holds rates

Dec 18 2012 11:59
Mumbai - India's central bank kept interest rates on hold on Tuesday, ignoring government pressure to reduce borrowing costs, but said it was shifting its focus towards boosting a flagging economy, raising the odds of a rate cut as early as January.

The Reserve Bank of India (RBI) reiterated guidance from its last policy meeting in October that it was likely to resume monetary policy easing in the January-March quarter, as inflation pressures are expected to ease in the next few months.

Wary of stubbornly high inflation, the RBI has kept its key policy rates on hold since a 50 basis point cut in April, in contrast to other big emerging market central banks in China, Brazil and South Korea that have been more aggressive in easing policy to support growth.

On Tuesday, the central held the repo rate at 8% and also kept its cash reserve ratio (CRR) for banks steady at 4.25%, its lowest level since 1974. The CRR is the share of deposits that lenders must keep with the central bank.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," the central bank wrote in its mid-quarter monetary policy review.

A Reuters poll last week showed 37 of 41 economists had expected the RBI to hold the policy repo rate steady, while respondents were roughly evenly split over the likelihood of a cut in the CRR.
A lower-than-expected headline inflation reading in data released on Friday, after the polling was completed, had been seen in some quarters as raising the chances of a rate cut.

"Whatever the RBI spelt out in October seems to have got support from the inflation trajectory," said Abheek Barua, chief economist at HDFC Bank, in New Delhi. "Net of the base effect, we see the current trend continuing and a case for a rate cut strengthening, which they could do in January."

Weak GDP performance

The central bank has repeatedly resisted pressure from the finance ministry to cut rates to prop up an economy that has posted GDP growth below 6% for the past three quarters and is on track for its weakest annual performance in a decade in the fiscal year ending March.

Whilst such a growth rate is still robust by the standards of developed economies, it is worryingly sluggish for a country that aspires to annual expansion of at least 8.5% to provide jobs for it burgeoning population.

"I think it is good that RBI sees there is room to ease and clearly they are taking a decision, keeping in mind their main job is combating inflation," said Raghuram Rajan, chief economic adviser to the finance ministry.

"But they also have some incentive to seek growth in the country." 

The 10-year bond yield fell 3 basis points to 8.14% from levels before the decision, reflecting somewhat heightened expectations of a rate cut early in 2013. The benchmark stock index was flat.

"Liquidity conditions will be managed with a view to supporting growth ... thereby preparing the ground for further shifting the policy stance to support growth," the RBI said.

The Congress-led minority government, faced with threats of sovereign rating downgrades due to a widening fiscal deficit, is trying to pass key reform bills allowing greater access to foreign investors in the retail, banking and insurance sectors.

Appreciating the government's recent policy initiatives, the central bank said such moves along with further reforms should boost business activity and investment climate.

Standard & Poor's last week issued another warning to India's credit rating, saying a wide fiscal deficit and a heavy debt burden were the most significant rating constraints. 

The wholesale price index (WPI), India's main gauge for inflation, softened to a 10-month low of 7.24% in November. It has remained above 7% for the past three years.

"Signs in softening RBI guidance is apparent as focus has shifted to growth, and odds for a rate cut in the January-March quarter are likely to gather considerable momentum here on," said Radhika Rao, an economist at Forecast Pte in Singapore.

"Barring a sharp acceleration in December WPI, we look for a 50 basis points reduction in Q1 2013, possibly front-loaded in the January meeting."

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economy  |  world



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