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RBI Signals Fastest BRIC Inflation Constrains Rate Cuts

April 17, 2012

The Reserve Bank of India logo is displayed outside the bank's headquarters in Mumbai. Photographer: Kainaz Amaria/Bloomberg

The Reserve Bank of India logo is displayed outside the bank's headquarters in Mumbai. Photographer: Kainaz Amaria/Bloomberg

India’s central bank said price pressures must be restrained even as policy needs to shift to help growth, signaling that elevated inflation will limit the magnitude of interest-rate cuts forecast to begin today.

“Monetary policy has to recognize the need for keeping inflation expectations anchored in an environment of significant upside risks to inflation, while shifting the balance of policy to arrest the deceleration in growth momentum,” the Reserve Bank of India said yesterday in a review of the economy ahead of its rate decision in Mumbai due at 11 a.m. today.

Costlier credit, policy gridlock and a weaker global recovery have sapped India’s expansion, spurring predictions of reductions in borrowing costs. At the same time, an increase in oil prices, rupee weakness and government spending may fan price pressures, with inflation slowing less than estimated in March to 6.89 percent.

“They are still concerned about inflation,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “It kind of reinforces that the room for big cuts is not there,” while not ruling out a rate cut today, he said.

India’s rupee, which tumbled 16 percent last year as growth decelerated and the nation’s trade gap widened, fell 0.7 percent to 51.6775 per dollar yesterday. The BSE India Sensitive Index of stocks rose 0.3 percent. The yield on the 8.79 percent note due November 2021 fell 1 basis point, or 0.01 percentage point, to 8.46 percent.

Tread With Care

“Overall, monetary policy has to tread with care in working towards reviving growth, while not exacerbating inflation and other risks,” the Reserve Bank said. Inflation is set to remain at about current levels in 2012-2013, it said.

Seventeen of 25 respondents in a Bloomberg News survey expect the monetary authority to reduce borrowing costs by 0.25 percentage point to 8.25 percent today, while three foresee a 0.5 percentage-point cut. Inflation has eased from more than 9 percent recorded in most of 2011.

Five economists in the Bloomberg survey predict India will keep rates unchanged for a fourth straight meeting, joining neighbors from Pakistan to Indonesia in leaving them on hold as it juggles growth risks with price pressures.

India’s anticipated monetary easing today would contrast with Asian neighbors including Thailand and Indonesia that have halted rate cuts as inflationary pressures gain. Bank of Korea Governor Kim Choong Soo this week urged major central banks to plan an orderly withdrawal of excess liquidity and said that further easing may hurt emerging economies and the global economic recovery.

China Threat

Still, China’s growth slowdown may limit the region’s economic recovery. Singapore’s exports unexpectedly dropped in March as shipments of electronics eased and petrochemical sales fell amid a decline in demand from China, a report today showed. Non-oil domestic exports fell 4.3 percent from a year earlier, after a revised 30.4 percent increase in February.

Foreign direct investment in China dropped for a fifth straight month in March as economic growth slowed, with inbound investment falling 6.1 percent from a year earlier to $11.76 billion, a report by the Ministry of Commerce showed today.

In Australia, the central bank said a weaker expansion flowing through to slower inflation would increase prospects for the first interest-rate cut this year, minutes of its April 3 meeting showed. The minutes reaffirmed that the next rate reduction hinges on an April 24 report on first-quarter inflation, as recent data indicates the economy is growing slower than the central bank predicted.

Mining Boom

The Reserve Bank of Australia decided against lowering borrowing costs at its three meetings this year as the global recovery stabilizes and a mining boom sustains domestic growth.

U.K. inflation probably held at 3.4 percent in March, while Euro-area inflation was 2.6 percent, according to Bloomberg News surveys ahead of reports today.

In the U.S., industrial production may have risen 0.3 percent in March from the previous month, according to the median forecast in a Bloomberg News survey ahead of a report today. Home starts increased to a 705,000 annual rate in March following a 698,000 pace the prior month, according to a Bloomberg survey median.

India’s economy may expand 7.2 percent in the financial year through March 31, 2013, according to a survey compiled by the central bank of forecasts from other organizations, yesterday’s report showed. The previous survey in January projected growth of 7.3 percent. Inflation may average 6.9 percent, the survey said, compared with an earlier 6.5 percent estimate.

Growth Estimate

Asia’s third-largest economy expanded 6.1 percent in the fourth quarter, the least in almost three years, hurt by declining investment and moderating consumer spending after the Reserve Bank raised rates by a record 3.75 percentage points from March 2010 to October last year to fight inflation.

While growth is likely to improve “moderately” in 2012- 2013, “depressed new investment may keep the pace of recovery slow,” the Reserve Bank said. Demand needs to be managed so that the current-account deficit doesn’t widen further and pressure the balance of payments, it said, adding that allowing higher petroleum-product prices would help that process.

The March climb in the benchmark wholesale-price index exceeded the median 6.65 percent estimate in a Bloomberg News survey of 33 economists, data showed yesterday. Indian inflation remains the fastest in the so-called BRIC group of largest emerging economies that also includes Brazil, Russia and China.

Supply-Side Constraints

“We will be addressing supply-side constraints that substantially impact food inflation,” Finance Minister Pranab Mukherjee said in New Delhi yesterday.

Central bank Governor Duvvuri Subbarao has already reduced the amount of deposits lenders must set aside as reserves twice in 2012 to alleviate a cash squeeze that threatens expansion. The Reserve Bank has lowered the cash reserve ratio by a combined 125 basis points to 4.75 percent.

Passenger car sales grew at the slowest pace in three years in the 12 months through March as higher rates crimped demand for products by automakers such as Maruti Suzuki India Ltd., maker of almost half the cars sold in the country.

Prime Minister Manmohan Singh’s government, grappling with fiscal and trade gaps and depressed industrial output, faces one of the most challenging periods since taking office in 2004.

In the budget on March 16, the administration announced record borrowing needs to plug a fiscal shortfall estimated at 5.1 percent of gross domestic product in 2012-2013.

“Fiscal consolidation as envisaged in the latest budget is subject to risks, especially with respect to subsidies,” the central bank said. “Tax revenues may also be adversely affected if the economic climate remains subdued.”

The current-account deficit reached $19.6 billion in the three months through December, the worst quarterly performance on record.

Policy reversals have further hindered Singh’s economic agenda, including the suspension in December of plans to open India’s retail industry to foreign companies.

To contact the reporter on this story: Kartik Goyal in Mumbai at

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

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