Bloomberg News

RBI Too Slow for Reliance Capital as Growth Cools

November 05, 2012

RBI Governor Duvvuri Subbarao

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

The Reserve Bank of India is moving too slow to counter the worst economic growth slump in a decade, according to Reliance Capital Ltd. (RCAPT), which manages the nation’s second-biggest mutual fund.

Governor Duvvuri Subbarao held the highest benchmark rate in the region unchanged at 8 percent last week to cool inflation, even as he cut his expansion estimate for the fiscal year to 5.8 percent, the slowest since 2003, from 6.5 percent. That prompted Finance Minister Palaniappan Chidambaram to say the government will “walk alone” to spur growth. Banks, the biggest buyers of local sovereign bonds, cut holdings by the most this year before the central bank’s policy announcement.

“The RBI is falling behind the curve and this can have negative implications for growth,” Amitabh Mohanty, head of debt strategies in Mumbai at Reliance Capital, controlled by billionaire Anil Ambani, said in an interview on Nov. 1. “The decision to maintain interest rates was disappointing for the bond market.”

Goldman Sachs Group Inc. and ING Groep NV have abandoned calls for a rate reduction by year-end since the RBI’s Oct. 30 meeting. The cost to lock in one-year borrowing costs in India using interest-rate swaps climbed 13 basis points in October, the biggest jump since January, to 7.75 percent, data compiled by Bloomberg show. Similar measures added five basis points to 3.20 percent in China and dropped 26 to 7.24 percent in Brazil.

Holding Rate

Subbarao has held the repurchase rate unchanged since a 50 basis point cut in April that was the only reduction since 2009. The benchmark was boosted by a record 375 basis points, or 3.75 percentage points, through 2010 and 2011 to curb inflation that averaged 8.8 percent in the past three years. Central bank rates are at 3 percent in China and 2.75 percent in South Korea.

Policy makers from Brazil to China and Korea have cut borrowing costs in the second half of 2012 to guard against a global slowdown. The world economy will expand 3.3 percent this year, the least since a recession in 2009, the International Monetary Fund predicted last month.

Quarterly expansion in India’s $1.8 trillion economy averaged 5.4 percent in the first half, versus 7.5 percent in the whole of 2011. Bank lending in India grew 16 percent in the 12 months ended Oct. 19, near the slowest pace in two years of 15.6 percent in February, central bank figures show.

The RBI pumped about 2.6 trillion rupees ($48 billion) into local markets this year via debt purchases and by reducing reserve requirements for lenders to a 36-year low to support Asia’s third-largest economy.

‘Challenge of Growth’

The central bank sees “a reasonable likelihood of further policy easing” only in the next quarter when inflation is expected to cool, it said in its policy statement on Oct. 30. The monetary authority estimated inflation will be 7.5 percent in March, compared with a 2012 high of 7.81 percent in September.

“Growth is as much a challenge as inflation,” Chidambaram, who had called for lower borrowing costs earlier last month, told reporters in New Delhi after the Reserve Bank’s decision. “If government has to walk alone to face the challenge of growth, then we’ll walk alone.”

Prime Minister Manmohan Singh’s administration started a policy revamp on Sept. 13, ending a two-year legislative paralysis by lowering energy subsidies and allowing more foreign investment in industries from airlines to retailing.

‘Still Waiting’

“The central bank is still waiting to see the government effectively implement the reforms it announced before it cuts interest rates,” said Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore. “The finance minister was probably a bit peeved that the RBI wasn’t prepared to take his word for it.”

Goldman Sachs now predicts the Indian central bank will lower the repo rate by 50 basis points in March.

Domestic banks lowered outstanding investments in sovereign debt by 37.8 billion rupees in the two weeks ended Oct. 19, the biggest reduction since December, according to the latest central bank data.

The yield on benchmark 10-year government bonds has climbed 16 basis points from a 14-month low of 8.04 percent in June as the RBI refrained from cutting rates, according to data compiled by Bloomberg. The extra amount investors seek to hold the notes instead of U.S. Treasuries has widened 21 basis points from a seven-month low of 630 touched last month.

Yield Advantage

Rupee-denominated sovereign debt returned 8.9 percent so far in 2012, trailing the 15.9 percent earned by Brazilian notes and the 10.2 percent gain on Russian securities, according to indexes compiled by JPMorgan Chase & Co. The rupee declined 1.5 percent to 54.6075 a dollar yesterday. The currency slid 1.8 percent last month after a 5.3 percent rally in the September quarter that was the best exchange-rate gain in Asia.

India’s relatively higher interest rates are still attractive to international investors, said Kieran Curtis, who helps manage about $4.5 billion in emerging-market debt at Aviva Investors Ltd. Aviva has added to holdings in recent months, according to Curtis.

Global investors bolstered ownership of rupee-denominated debt by $1.3 billion in October, the biggest increase since February, according to data compiled by Bloomberg.

“The high inflation is a clue that growth has been well above potential, so I don’t think that too much growth will be sacrificed by not cutting rates,” London-based Curtis said in an e-mailed response to Bloomberg questions on Nov. 2.

More Uncertainty

Bond risk for government-controlled State Bank of India, a proxy for the sovereign, has remained higher this year. The cost of insuring the lender’s debt for five years against non-payment using credit-default swaps has averaged 326 basis points so far in 2012, compared with 237 a year earlier, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

“Considering the buildup of expectations for a repo-rate cut before the October review, the lack of action has caused yields to jump,” Upasna Bhardwaj, an economist at ING Vysya Bank Ltd. in Mumbai, part of the biggest Dutch financial- services company, said in an interview yesterday. “The RBI has also lowered the possibility of a cut this quarter, which increases uncertainty. I don’t see much downside to yields.”

Bhardwaj predicts the 10-year bond yield will stay between 8.15 percent and 8.25 percent until year-end.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at

To contact the editor responsible for this story: Sandy Hendry at

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