Subbarao May Keep Indian Interest Rates on Hold at Record Low

Jan. 27 (Bloomberg) -- India's central bank Governor Duvvuri Subbarao may keep interest rates unchanged today after lowering them to a record this month.

The Reserve Bank of India will leave the reverse repurchase rate at 4 percent, according to 14 of 21 economists surveyed by Bloomberg News. The rest expect a reduction. A decision is due at 11:15 a.m. in Mumbai.

Subbarao, who alone decides monetary policy, unexpectedly cut rates on Jan. 2 to coincide with Prime Minister Manmohan Singh's second fiscal stimulus package since December. After reversing four years of monetary policy tightening in little over three months, the governor may focus today's scheduled meeting on his assessment of the economy.

``Rates haven't been reduced enough given the current economic scenario, but it's unlikely they will cut today,'' said Soumendra K. Dash, chief economist at Credit Analysis & Research Ltd., a ratings company in Mumbai. ``The bank will assess the impact of the steps taken so far before resuming.''

Since January, data has confirmed Subbarao's comments that the economy is slowing along with investment.

Exports, 14 percent of gross domestic product, sank 9.9 percent in November from a year earlier. Industrial production grew at half the pace between April and October than for the same period a year earlier.

Foreign Investment

Foreign investors, who were instrumental in driving the Indian economy's record 9.3 percent expansion in the three years to March 2008, are fleeing. Last year they pulled out $13.1 billion from Indian stocks after buying $17.2 billion of equities in 2007. India's Sensitive Index, or Sensex, has dropped 10 percent so far this year, extending last year's 52 percent slide.

``Share prices have tanked and confidence has evaporated,'' said Tehmina Khan, a London-based economist at Capital Economics Ltd. ``What's more, domestic lenders too have grown increasingly cautious.''

The argument that India's inflation rate requires policy caution is also losing credence. Wholesale prices for the week ended Jan. 3 rose 5.6 percent, less than half the pace in August.

Subbarao may today lower his forecast for India's growth for the year to March 31 from 7.5 percent, the weakest in four years, and predict slower inflation.

Along with the one percentage point cut to the reverse repurchase rate on Jan. 2, Subbarao lowered the repurchase rate by the same margin to 5.5 percent and cut the amount of cash that lenders need to set aside as reserves by 50 basis points to 5 percent.

Domestic Demand

``Policy rate cuts and liquidity measures cannot prevent a sharp slowdown in the growth of domestic demand,'' said Chetan Ahya, a Singapore-based economist at Morgan Stanley.

Commercial lenders have been slow to follow the central bank's lead in cutting rates because they are still paying high interest on deposits following the RBI's efforts to control inflation by raising interest rates to a seven-year high in July.

Lending rates for the best corporate customers at ICICI Bank Ltd., the nation's second biggest, stand at 16.75 percent, reflecting only one 0.5 percentage point cut. The central bank's repurchase rate, at which it lends to commercial banks, has dropped by 3.5 percentage points since October to 5.5 percent.

Singh's Surgery

Singh, who underwent heart bypass surgery on Jan. 24, has been coordinating with Subbarao since October to ensure investment doesn't suffer from the global credit crunch. Investment typically accounts for about one third of growth in the $1.2 trillion economy.

The government has undertaken a $4 billion plan to invest in roads and ports, and on Jan. 2 raised the overseas investment limit in the local corporate bond market to $15 billion from $6 billion.

Singh is also under pressure to prop up the economy and prevent companies from scaling back production and firing workers before general elections scheduled for April and May this year.

Tata Motors Ltd., India's biggest truckmaker, stopped production at a commercial-vehicle factory for six days this month. Hyundai Motor Co.'s Indian unit is cutting output and firing temporary staff. Indian exporters said this month they expect to cut about 10 million jobs by March.

``Ensuring job security is the main challenge before the government ahead of the elections,'' said Rajeev Malik, a Singapore-based economist at Macquarie Group Ltd. ``The mother of all monetary easing is still alive and kicking, it's just that they might take a pause today.'