Bloomberg News

Gokarn Says Slowing India Growth May Help Boost Rate-Cut Room

June 01, 2012

The Reserve Bank of India may have more room to cut interest rates after economic expansion slowed and oil prices fell, even as inflation remains a risk, its Deputy Governor Subir Gokarn said.

“The factors that are, perhaps, providing some more room, one is, growth has slowed down somewhat more than expected,” Gokarn said in a speech in Kochi in southern India yesterday. “Second, oil prices have come down somewhat more than expected. Things are working on both sides. Inflation risks remain.”

India’s economy expanded at the weakest pace in nine years last quarter, hurt by slower investment, persistent inflation and the impact on exports of Europe’s debt crisis. The central bank has previously signaled that price pressures from a plunge in the rupee, government spending and energy costs may limit scope to add to the first rate cut in April since 2009.

Gokarn’s “comments certainly open the door for possible interest-rate cuts,” said Prasanna Ananthasubramanian, Mumbai- based chief economist at ICICI Securities Primary Dealership. “But it is not clear if it will be immediate or over the course of the year.”

The rupee strengthened 0.9 percent to 55.585 at the close in Mumbai yesterday. The currency has declined about 19 percent in the past 12 months. The BSE India Sensitive Index of stocks fell 1.6 percent. The yield on the 8.79 percent note due November 2021 was little changed at 8.37 percent.

Rupee Concern

The Reserve Bank is looking at all options to steady the rupee and doesn’t rule out selling dollars to oil companies to help stabilize the currency, Gokarn told reporters before his speech.

Brent crude, the benchmark for almost all of India’s imports, has fallen about 14 percent in the past year.

It would be “naive” to think that interest-rate actions alone can revive economic expansion, Gokarn also said. It’s necessary to address concerns about the fiscal deficit, infrastructure and regulatory constraints, he said.

On the debt crisis in Europe, Gokarn said one of the risks for India is that capital inflows my dry up if Greece exits the 17-nation euro area.

Indian manufacturing growth slowed in May, a private survey showed yesterday, adding to signs of weakening demand. A purchasing managers’ index was at 54.8 from 54.9 in April, HSBC Holdings Plc and Markit Economics said in an e-mailed statement. A number above 50 indicates growth.

A similar manufacturing gauge for China from HSBC and Markit signaled a contraction for a seventh straight month, the longest such stretch since the global financial crisis, another report showed.

Growth Slowdown

India’s gross domestic product increased 5.3 percent last quarter from a year earlier, the least since 2003, the government said two days ago. Inflation accelerated to 7.23 percent in April, the fastest pace among the largest emerging economies.

The Reserve Bank of India lowered its benchmark repurchase rate in April after increasing it by a record 3.75 percentage points from mid-March 2010 to October last year to try and contain jumps in the cost of living.

The central bank forecasts the economy will recover in the fiscal year through March 2013, posting growth of 7.3 percent.

The government expects that the steps it is taking to bolster economic expansion will improve market sentiment, Finance Secretary R.S. Gujral told reporters after a briefing in New Delhi yesterday. He didn’t specify the measures.

The decline in the rupee is a concern, Commerce Minister Anand Sharma said at the briefing. He added India’s goals are to increase exports by 20 percent this fiscal year and to achieve $500 billion of overseas sales by 2014.

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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