Bloomberg News

India Rate-Cut Odds Climb as Policy Revamp Aids Rupee

October 25, 2012

RBI Governor Duvvuri Subbarao

Duvvuri Subbarao, governor of the Reserve Bank of India (RBI). Photographer: Dhiraj Singh/Bloomberg

India’s central bank will consider reducing interest rates for the first time since April after government efforts to pare the budget deficit stemmed a slide in the rupee, boosting scope to stimulate the economy.

Governor Duvvuri Subbarao will cut the repurchase rate to 7.75 percent from 8 percent, 11 of 28 analysts said in a Bloomberg News survey ahead of an Oct. 30 decision. One predicted a reduction to 7.5 percent and the rest no change. A majority of respondents in another poll forecast Subbarao will lower banks’ reserve ratios to spur lending.

Finance Minister Palaniappan Chidambaram said Oct. 12 that India needs cheaper credit, following a revamp of economic policy that included fuel-subsidy curbs and helped make the rupee one of Asia’s best-performing currencies in the past three months. While Subbarao has signaled that a narrower budget gap may provide more room to join nations from Brazil to Thailand in extending rate cuts, he also faces inflation of almost 8 percent.

“There is blatant pressure from the government to ease and it’ll be hard for the central bank to ignore it,” said Rajeev Malik, a Singapore-based senior economist at CLSA Asia-Pacific Markets. “Our case for cutting rates rests on the RBI making a reciprocal gesture to the government following its initiatives in the last one month. But more needs to be done on the fiscal deficit.”

The Reserve Bank of India unexpectedly reduced the amount of deposits lenders must set aside as reserves last month to boost growth, even as it kept interest rates unchanged as expected by the majority of economists in a Bloomberg survey.

Rupee Appreciation

Prime Minister Manmohan Singh’s administration unveiled an increase in diesel prices on Sept. 13 and limited the supply of subsidized cooking gas to cap a budget shortfall that has raised the odds of a credit-rating downgrade to junk status.

The next day, it opened industries such as retail to more foreign investment, snapping months of gridlock over how to bolster a struggling economy.

The rupee has risen about 3.5 percent versus the dollar since Sept. 13, when the first elements of the overhaul were announced, paring its one-year fall to 7.5 percent. It is up 4.9 percent in the past three months, the biggest gainer in a basket of 11 Asian currencies tracked by Bloomberg. The BSE India Sensitive Index of stocks has climbed more than 11 percent in the same period, outperforming the MSCI Asia-Pacific Index.

Stocks Gain

Asian stocks advanced today for the first time in five days after the Federal Reserve said yesterday it will maintain stimulus, while a report showed sales of new U.S. homes rose at the fastest pace in two years.

New Zealand’s new central bank chief kept the official cash rate at 2.5 percent as a stronger housing market offset a fragile global economy. In contrast, the Philippines lowered borrowing costs for the fourth time this year to 3.5 percent.

Other reports showed Singapore’s industrial output unexpectedly fell for a second month in September and Thailand’s production slumped more than economists estimated.

In Europe, Sweden left its key interest rate at 1.25 percent. The U.K. reported 1 percent economic growth in the three months through September from the previous quarter.

U.S. durable goods orders probably rose in September and initial jobless claims may have eased to 370,000 in the week ended Oct. 20 from 388,000 the previous week, a survey showed.

Fastest Inflation

Further rupee appreciation will help to damp India’s inflation, Chidambaram said earlier this month, adding that “if the fiscal policy steps that we are taking encourage the central bank to take monetary policy action which will result in lower interest rates, I think that will be good.”

Inflation quickened to 7.81 percent in September, the fastest in the BRIC group of major emerging nations that also includes Brazil, Russia and China. Food and fuel costs and costlier imports have kept the pace of price gains above the central bank’s comfort level of about 5 percent.

Asia’s No. 3 economy has the widest BRIC budget deficit at 5.8 percent of gross domestic product in the year ended March. Standard & Poor’s predicts the imbalance may widen to about 6 percent in the current fiscal year, compared with the government’s goal of 5.1 percent.

The country’s trade shortfall widened to $18.1 billion in September, the biggest in more than a year, as faltering global growth contributed to a drop in exports.

India’s economy expanded 5.5 percent in the three months through June from a year earlier, holding near the three-year low of 5.3 percent in the previous quarter.

World Outlier

Subbarao has said the combination of elevated inflation and weaker economic expansion makes India “somewhat of an outlier in the world.” The Reserve Bank has refrained from adding to a 50 basis-point repurchase-rate cut in April.

Price pressures may prompt the monetary authority to leave the policy rate unchanged and instead cut the cash reserve ratio for the fourth time this year, according to Madan Sabnavis, chief economist at Credit Analysis & Research Ltd. in Mumbai.

Fifteen of 26 economists in Bloomberg’s survey said the Reserve Bank will lower the ratio to 4.25 percent from 4.5 percent. Two predict 4 percent and the rest expect no change.

Monetary policy will be guided partly by the outlook for the fiscal gap, Subbarao said Oct. 4, adding “the effort will be to rein in inflation but support growth to the extent possible.”

India would join countries including Brazil, Thailand, South Korea and Australia in cutting borrowing costs this month if it lowers the repurchase rate.

“The RBI will ease policy on Oct. 30 as a pat on the back for the government’s recent reforms,” said Robert Prior- Wandesforde, an economist at Credit Suisse Group AG in Singapore.

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


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