India Pauses Record Interest-Rate Rises on Risks to Growth
December 22, 2011, 12:37 PM ESTBy Kartik Goyal
(Updates with bonds, rupee in first paragraph.)
Dec. 16 (Bloomberg) -- India’s central bank refrained from raising interest rates for the first time in eight meetings as inflation cools and the fallout from Europe’s debt crisis threatens growth. The rupee pared gains and bonds rose.
The Reserve Bank of India left the repurchase rate at 8.5 percent, according to an e-mailed statement in Mumbai today. The decision matched all 14 estimates in a Bloomberg News survey.
Governor Duvvuri Subbarao paused after inflation slowed to a one-year low and industrial output fell for the first time in 28 months, tilting the balance of risks toward growth. The rupee rebounded today from a record low, helping cut import costs and giving the central bank scope to spur expansion.
“It makes sense to hold rates as growth is cooling amid a global slowdown and inflation is showing signs of easing,” Rupa Rege Nitsure, a Mumbai-based economist at the state-owned Bank of Baroda, said before the release. “The RBI will have to keep rates high for now as inflation is still quite elevated.”
India’s rupee, which has weakened about 15 percent this year, surged as much as 2.7 percent against the U.S. dollar earlier today. The jump followed the central bank’s measures yesterday including curbs in rupee-forward trading after the currency dropped to an all-time low of 54.3050.
Rupee, Bonds
The rupee retreated to 52.87 per dollar at 11:58 a.m. in Mumbai from 52.74 before the Reserve Bank’s policy announcement, according to data compiled by Bloomberg. The yield on the 8.79 percent government note due November 2021 fell to 8.46 percent from 8.52 percent earlier, according to the central bank’s trading system. The BSE India Sensitive Index, which has lost a fifth of its value in 2011, climbed 0.6 percent.
Besides industrial production shrinking, growth prospects were set back by the government’s decision on Dec. 7 to put on hold plans to allow overseas retailers such as Wal-Mart Stores Inc. to open supermarkets. The move followed protests by the opposition and allies, and sent the stock index to its biggest three-day drop since July 2009.
While India’s benchmark wholesale-price inflation slowed to a one-year low of 9.11 percent in November, it’s still higher than in other so-called BRIC nations. Consumer prices rose 6.6 percent in Brazil, 6.8 percent in Russia and 4.2 percent in China last month.
Industrial Slump
Still, the Reserve Bank paused its monetary tightening after industrial production fell 5.1 percent in October from a year earlier and the economy expanded 6.9 percent last quarter, the weakest pace in more than two years. The central bank has increased its repurchase rate by 375 basis points in 13 moves since mid-March 2010, the fastest round of increases since the central bank was established in 1935.
“With slowing growth momentum amidst moderating inflation and heightened uncertainty in global environment, the current phase of rate tightening is complete,” Shubhada Rao, Mumbai- based chief economist at Yes Bank Ltd., said before the report. “The retail FDI reversal is very disappointing and what India needs is a fresh batch of reforms to boost the economy.”
Prime Minister Manmohan Singh, in an interview with Bloomberg News this week, said he expects to succeed in his push to open the nation’s retail market to foreign companies after regional elections conclude by March. He said the slide in the rupee won’t diminish investor confidence in India and the economy will return to a long-term growth pace of 9 percent.
Singh, halfway through his second term, said India’s gross domestic product will expand 7.5 percent in the year ending March 31 and inflation will cool to between 6 percent and 7 percent.
Earnings Estimate
Even so, analysts are slashing their earnings estimates for companies in Asia’s third-largest economy.
Earnings forecasts for Sensitive Index companies for the year ending in March 2012 have fallen 7.9 percent to 1,160 rupees ($22) per share, the biggest drop since the 12 months ended March 2009, according to about 1,500 estimates compiled by Bloomberg. Analysts cut outlooks for Maruti Suzuki India Ltd., the country’s biggest carmaker, and Tata Steel Ltd., the largest producer of the alloy, by at least 29 percent, the data show.
The Reserve Bank’s decision to keep borrowing costs unchanged may also have been prompted by a cash squeeze in commercial lenders.
Cash availability with Indian lenders dropped after the central bank bought rupees to stem the decline in the currency and companies borrowed money to fund imports, Mahendra Jajoo, the Mumbai-based head of fixed-income investments at Pramerica Asset Managers, a unit of Newark, New Jersey-based Prudential Financial Inc., said before the report.
Cash Squeeze
In an indication of cash shortages, lenders borrowed 924.7 billion rupees on average a day in November from the Reserve Bank, almost twice the amount sought in October, according to data compiled by Bloomberg. They borrowed 867.6 billion rupees on average a day this month. Overnight rates surged to 9.15 percent today, the highest level in three years.
The central bank resumed open-market purchases of sovereign debt last month for the first time since January to boost the amount of cash in the banking system. The monetary authority has purchased 243 billion rupees of government debt in auctions over the past month, central bank data show.
“We hope the RBI will now shift its focus to encouraging growth,” Chandrajit Banerjee, director general of the Confederation of Indian Industry, said before the release. “The industrial slowdown is taking very serious dimensions and there is an urgent need to improve sentiments.”
--With assistance from Manish Modi, Unni Krishnan, Sam Nagarajan and Pradeep Kurup in New Delhi and Rajhkumar Shaaw in Mumbai. Editors: Cherian Thomas, Stephanie Phang
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
