Subbarao Says India May Not Increase Rates for Next Three Months

India’s central bank said it probably won’t raise interest rates in the next three months after tightening monetary policy the most in Asia this year.

“Immediate future rate action is unlikely barring some shocks,” Reserve Bank of India Governor Duvvuri Subbarao said at a press conference in Mumbai yesterday after increasing benchmark rates for a sixth time in 2010. “The question is what is immediate future? I would believe it is three months.”

India’s 12-year bonds gained the most in more than two months on Subbarao’s guidance as nations from Japan to the U.S. consider additional monetary stimulus to support economic growth. The prospective pause comes as Subbarao said that global liquidity and rate differentials with advanced nations may lead to an “intensification” of capital flows into India.

“At this point the RBI has almost ruled out action in the next policy decision,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. “There are uncertainties on the horizon, especially the impact of global quantitative easing on capital flows to India.” India’s central bank is scheduled to announce its next rate decision on Dec. 16.

Yields on India’s most-traded debt due 2022 fell six basis points, or 0.06 percentage point, to 8.01 percent, the lowest level since September, at close of trading in Mumbai yesterday. The rupee appreciated 0.2 percent to 44.3775 per dollar, rising the most in a week, while the Bombay Stock Exchange’s Sensitive Index was little changed at 20,345.69.

India’s Move

India joined Australia in increasing borrowing costs amid the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis.

Subbarao boosted the repurchase rate by a quarter-point to 6.25 percent and the reverse repurchase rate by a similar margin to 5.25 percent. Australia’s central bank Governor Glenn Stevens raised the overnight cash rate target a quarter point to 4.75 percent in Sydney yesterday. It was the RBA’s first move in six months.

The U.S. Federal Reserve started a two-day meeting yesterday to consider pumping additional stimulus into the world’s largest economy. The Fed may today announce a plan to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.

About 18 hours after the Fed’s move, the Bank of England will announce the result of its monetary policy meeting. The European Central Bank will go public with its decision 45 minutes later.

The Bank of Japan cut rates on Oct. 5 and brought forward the date of its next policy meeting to Nov. 4 and 5 to discuss purchases of exchange-traded funds and real-estate investment trusts.

Inflation Woes

Subbarao’s priority is to slow the fastest inflation after Argentina in the Group of 20 nations and protect the purchasing power of 75 percent of Indians who live on less than $2 a day. Consumer prices rose 11.1 percent in Argentina in September, while CPI for industrial workers gained 9.9 percent in India.

“Based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low,” Subbarao said.

He said “concerted” policy actions by the central bank will help slow benchmark wholesale-price inflation to 5.5 percent by March 31 from 8.6 percent in September. Subbarao forecast India’s $1.3 trillion economy may expand 8.5 percent in the year ending March 31, the fastest pace in three years.

‘Capital Inflows’

“Inflation will probably slow soon and the RBI is increasingly concerned about high capital inflows and rupee appreciation,” Vishnu Varathan, Singapore-based Asia economist at Capital Economics Ltd., said in a note yesterday. He said the Reserve Bank may increase borrowing costs one more time by a quarter-point in early 2011.

Since Subbarao’s first rate increase on March 19, the spread between India’s debt due in a decade and 10-year Treasuries widened 117 basis points, or 1.17 percentage points, to 537 yesterday. The gap, which has averaged 317 in the past decade, reached a 10-year high of 567 basis points on Oct. 20.

Higher yields spurred an unprecedented $10 billion inflow into rupee debt this year. Overseas funds also poured a record $25 billion into Indian stocks on prospects of faster growth in the South Asian nation, strengthening the currency and driving the Sensitive Index, or Sensex, to near a record.

Since Jan. 1, the rupee has risen 4.6 percent against the dollar while the Sensex has jumped 16.5 percent.

Exporters’ Protest

The climb threatens software exporters including Infosys Technologies Ltd., which said last month the currency’s move will “kill” them. Infosys said it suffers a 0.4 percentage- point drop in its operating margin for every 1 percent of appreciation in the rupee versus the dollar.

Subbarao said “excess global liquidity” along with the “significant” growth and interest-rate differentials between advanced countries and India may result in an “intensification” of capital flows into India.

“We will take action as warranted with a view to mitigating any potentially disruptive effects of lumpy and volatile capital flows and sharp movements in domestic liquidity conditions, consistent with the broad objectives of price and output stability,” Subbarao said.

The central bank, which last intervened to buy or sell rupees in the market in 2009, says that the currency’s strength will be limited by the nation’s deteriorating trade balance. The current-account deficit widened to a record $13.7 billion in the three months through June, the Reserve Bank said Sept. 30.

Even so, the bank isn’t in favor of the currency appreciating past 43 against the dollar, a finance ministry official with direct knowledge of the matter said on Oct. 15.