Bloomberg News

Gokarn Says Visible Drop in Indian Prices Will Trigger Rate Cut

February 14, 2012

Feb. 3 (Bloomberg) -- Reserve Bank of India Deputy Governor Subir Gokarn said the monetary authority will cut borrowing costs once it’s confident inflation will keep slowing.

“The stance now is that we have reached the peak and any further action will be toward easing,” Gokarn, 52, said in an interview at his office while discussing the rupee, the government’s budget deficit and bond repurchases. The central bank isn’t concerned about the currency’s record monthly advance in January “because in a sense it’s a correction,” following last year’s 16 percent decline, he said.

India’s central bank is under pressure to lower borrowing costs and protect the economy from the European debt crisis after counterparts in Brazil and Russia cut rates in recent months. The Indian government can help reduce rates by narrowing its budget gap as the fastest pace of price increases among the so-called BRIC nations slows to 7 percent in March from 9.68 percent a year earlier, according to Gokarn.

Once the central bank has confidence that the “direction will continue, that’s really going to be the trigger,” Gokarn said in the interview yesterday. “The visibility of the decline, I think, is the most important indication.”

Higher government spending on subsidies in the run-up to federal elections in two years threatens to stoke prices and limit the scope for monetary policy easing to support growth in Asia’s third-largest economy. The nation’s budget deficit reached 92.3 percent of the fiscal-year target in the nine months through December, a report showed this week.

“The comments clearly indicate the direction of the monetary policy is towards reducing rates,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. “The timing and the quantum of rate cuts will still be dependent on the cut in the budget deficit.”


India’s benchmark inflation rate of 7.47 percent is the fastest among the BRIC nations, even as it slowed to a two-year low in December. Consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China the same month.

“While we have a medium-term goal of 4 to 4.5 percent for inflation, that’s not a threshold that we have to reach before we consider action,” Gokarn said in the office, adorned by photographs and books, including a biography of Apple Inc. founder Steve Jobs. “It’s the directionality.”

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

The yield on the 8.79 percent government bonds due November 2021 declined two basis points, or 0.02 percentage point, to 8.13 percent, a nine-month low, in Mumbai yesterday, according to the central bank’s trading system.

Encourage Hedging

The rupee plunged 16 percent last year, making it the worst performing currency in Asia and prompting the central bank to clamp down on speculation. The measure rose 0.2 percent to 49.16 against the dollar yesterday after gaining 7.3 percent in January.

The central bank last year tightened rules on trading in the domestic currency-forwards market and said it will reduce the amount of open positions dealers can maintain overnight.

“The measures we have taken always come at a cost,” Gokarn, a former Asia-Pacific chief economist with Standard & Poor’s, said. When markets return to “normality, then of course these measures will be considered and taken back.”

Yesterday the central bank asked lenders to “rigorously evaluate” risks from their clients’ unhedged foreign-exchange positions. Gokarn in the interview said the central bank wants to encourage hedging.

Cash Shortage

To control inflation, the Reserve Bank raised borrowing costs by a record 375 basis points in 13 moves from mid-March 2010 before pausing for a second straight meeting in January. Last month, it cut India’s growth forecast to 7 percent in the year through March from the 7.6 percent predicted in October. It kept the inflation estimate at 7 percent.

The central bank lowered the cash reserve ratio to 5.5 percent from 6 percent, reducing the amount of deposits lenders need to set aside as reserves for the first time since 2009 in a move it estimated would add about 320 billion rupees ($6.5 billion) into the banking system.

In an indication of cash shortages, banks borrowed 1.3 trillion rupees on average a day from the monetary authority in January, compared with 1.16 trillion rupees in December, according to data compiled by Bloomberg. Overnight rates surged to 9.45 last week, near a three-year high.

To ease the cash squeeze in the banking system, the Reserve Bank resumed open-market purchases of government notes after 10 months in November and has so far purchased 719 billion rupees of the securities in auctions, official data show.

Indian bonds fell the most in 26 months on Jan. 24 on speculation the central bank will halt buying government bonds after reducing reserve requirements for banks.

“To the extent that pressures remain, we are always open to carrying out” bond repurchases, Gokarn said. “The other form of liquidity infusion is to buy dollars. If circumstances are right, we’ll certainly consider it. When we’ll have those circumstances is difficult to say.”

--Editors: Arijit Ghosh, Abhay Singh

To contact the reporters on this story: Kartik Goyal in New Delhi at; Daniel Moss in Washington at

To contact the editor responsible for this story: Stephanie Phang at

Toyota's Hydrogen Man
blog comments powered by Disqus