Bloomberg News

India Growth Weaker as Inflation Still High, Central Bank Says

February 01, 2012

Jan. 24 (Bloomberg) -- India’s economic growth is weakening more than anticipated and inflation remains “high” as the rupee’s fall threatens to stoke price pressures, the central bank said, signaling it may leave interest rates unchanged.

“The growth slowdown, high inflation and currency pressures, complicate policy choices,” the Reserve Bank of India said in a report yesterday before its rate decision in Mumbai. The “critical factors” ahead will be “core inflation and exchange rate pass-through,” it said, adding that keeping the “liquidity deficit” in acceptable limits is also a priority.

India faces slower expansion as the global recovery falters and inflation which at 7.47 percent is the fastest among the so- called BRIC nations. Brazil, Russia and China, the group’s other members, have cut rates or lowered reserve requirements for lenders in recent weeks as they strive to shield growth from the impact of Europe’s debt crisis.

“The RBI is faced with a complex job of curbing inflation and at the same time protecting growth,” said Madan Sabnavis, chief economist at Mumbai-based CARE Ratings. “The prudent action at this juncture will be to keep rates on hold.”

The rupee, Asia’s worst-performing currency in 2011 with a 16 percent slide, climbed 0.5 percent to 50.0825 per dollar at the close in Mumbai yesterday. The BSE India Sensitive Index rose 0.1 percent.

The Reserve Bank will keep its repurchase rate at 8.5 percent today for a second month, all 21 economists in a Bloomberg News survey said. It is due to release its monetary- policy announcement at 11 a.m.

Cash Reserve Ratio

Five respondents predicted it will cut the cash reserve ratio to alleviate a shortage of funds in the economy. The central bank has added 718.8 billion rupees ($14.4 billion) into the banking system since the start of November by purchasing government securities from lenders.

“Growth in India is moderating more than was expected earlier,” the central bank said. “While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns” that will be “temporary respite” at best unless supply bottlenecks are tackled, it said.

India’s wholesale-price inflation slowed to a two-year low of 7.47 percent in December. By comparison, consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China last month.

The moderation in inflation is “likely to persist” in the three months through March, the central bank said in the report.

At the same time, it said “price pressures remain.” Risks stem from “suppressed domestic energy prices, the incomplete pass-through of rupee depreciation and slippage in fiscal deficit,” it said.

Maruti Price Rises

Maruti Suzuki India Ltd., maker of half the cars sold in India, has raised prices of all its models this month, citing higher raw material costs and the decline in the currency.

The Reserve Bank raised borrowing costs by a record 375 basis points in 13 moves from mid-March 2010 before pausing in December.

India’s economy may expand 7 percent in the fiscal year through March 31, according to a survey compiled by the central bank of forecasts from agencies including the International Monetary Fund and the Asian Development Bank, yesterday’s report showed. October’s survey projected growth of 7.6 percent.

Inflation may average 8.8 percent in the period, the survey said, the same as the previous estimate.

Indian expansion is set to be “below potential” in the current fiscal year before recovering at a “modest pace,” the Reserve Bank said. Lower external and investment demand has affected growth, it said.

“While headline inflation has eased, price pressures as reflected in demand-side inflation still persist in the economy, thus the RBI is unlikely to cut rates before April,” Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt., said before the report.

Prime Minister Manmohan Singh is under pressure to bolster the economy following street protests against price increases, corruption allegations and the struggle to attract more foreign investment. His government faces regional elections starting this month.

--Editors: Sunil Jagtiani, Cherian Thomas

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Brendan Murray at brmurray@bloomberg.net


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