Subbarao Leaves Benchmark Repo Rate Unchanged to Support Economic Growth

By Kartik Goyal - Dec 16, 2011 6:41 PM GMT+0530

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Enlarge image India Pauses Rate Rises as Growth Risks Halt Tightening

The rupee rebounded today from a record low, helping cut import costs and giving the central bank scope to spur expansion. Photographer: Kainaz Amaria/Bloomberg
Reserve Bank of India Monetary Policy, Currencies

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Dec. 16 (Bloomberg) -- Ashok Bhundia, a fixed-income strategist at Bank of America Merrill Lynch in Hong Kong, talks about Reserve Bank of India monetary policy, and investment strategy for global currencies. India’s inflation slowed to the lowest level in a year, boosting the central bank’s scope to support growth by pausing its record interest-rate increases. Bhundia speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

India’s central bank refrained from raising interest rates for the first time in eight meetings as inflation cools and the fallout from Europe’s debt crisis threatens growth. Ten-year bonds gained the most in six months.

The Reserve Bank of India left the repurchase rate at 8.5 percent, according to an e-mailed statement in Mumbai today. The decision matched all 14 estimates in a Bloomberg News survey.

Governor Duvvuri Subbarao paused after inflation slowed to a one-year low and industrial output fell for the first time in 28 months, tilting the balance of risks toward growth. The rupee rebounded today from a record low, helping cut import costs and giving the central bank scope to spur expansion.

“It’s prudent to pause as growth is slowing substantially amid global uncertainties and inflation is on a downward path,” said Samiran Chakraborty, a Mumbai-based economist at Standard Chartered Plc. “The RBI will have to wait for a quarter or so before cutting rates as inflation is still high.”

The yield on the 8.79 percent bonds due November 2021 fell 11 basis points, or 0.11 percentage point, to 8.38 percent at the close in Mumbai. The BSE India Sensitive Index, which has lost a fifth of its value in 2011, declined 2.2 percent.
Rupee’s Rebound

India’s rupee, which has weakened about 15 percent this year, surged 1.7 percent to 52.7450 per dollar, the biggest gain since May 2010. The jump followed the central bank’s move to curb rupee-forwards trading yesterday after the currency dropped to an all-time low of 54.3050 per dollar.

“The need to improve business sentiments and recover the growth momentum in the remaining months of the current fiscal necessitated a review of the monetary policy stance,” Finance Minister Pranab Mukherjee said in an e-mailed statement today.

Besides industrial production shrinking, growth prospects were set back by the government’s decision on Dec. 7 to put on hold plans to allow overseas retailers such as Wal-Mart Stores Inc. to open supermarkets. The move followed political protests, and sent the stock index to its biggest three-day drop since July 2009.

“Growth is clearly decelerating,” the central bank said in today’s statement. “This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.”

Even so, the central bank said inflation risks “remain high” and the “rupee remains under stress.”
BRIC Inflation

India’s benchmark wholesale-price inflation slowed to a one-year low of 9.11 percent in November. It’s still higher than in other so-called BRIC nations. Consumer prices rose 6.6 percent in Brazil, 6.8 percent in Russia and 4.2 percent in China last month.

While the “projected trajectory” for inflation remains, “from this point on, monetary policy actions are likely to reverse the cycle, responding to risks to growth,” the central bank said.

Subbarao told reporters in Mumbai today that he won’t speculate when the central bank would start cutting rates, saying a “rate cut is an event some way ahead.”

The Reserve Bank paused its monetary tightening after industrial production fell 5.1 percent in October from a year earlier and the economy expanded 6.9 percent last quarter, the weakest pace in more than two years. The central bank has raised its repurchase rate by 375 basis points in 13 moves since mid- March 2010, the fastest round of increases since the central bank was established in 1935.
Tightening Complete

“With slowing growth momentum amidst moderating inflation and heightened uncertainty in the global environment, the current phase of rate tightening is complete,” Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd., said before the report. “The retail FDI reversal is very disappointing and what India needs is a fresh batch of reforms to boost the economy.”

Prime Minister Manmohan Singh, in an interview with Bloomberg News this week, said he expects to succeed in his push to open the nation’s retail market to foreign companies after regional elections conclude by March. He said the slide in the rupee won’t diminish investor confidence in India and the economy will return to a long-term growth pace of 9 percent.

Singh, halfway through his second term, said India’s gross domestic product will expand 7.5 percent in the year ending March 31 and inflation will cool to between 6 percent and 7 percent.
Earnings Estimate

Still, analysts are cutting their earnings estimates for companies in Asia’s third-largest economy.

Earnings forecasts for Sensitive Index (SENSEX) companies for the year ending in March 2012 have fallen 7.9 percent to 1,160 rupees ($22) per share, the biggest drop since the 12 months ended March 2009, according to about 1,500 estimates compiled by Bloomberg. Analysts cut outlooks for Maruti Suzuki India Ltd., the country’s biggest carmaker, and Tata Steel Ltd., the largest producer of the alloy, by at least 29 percent, the data show.

The Reserve Bank’s decision to keep borrowing costs unchanged may also have been prompted by a cash squeeze in commercial lenders.

Cash availability with Indian lenders dropped after the central bank bought rupees to stem the decline in the currency and companies borrowed money to fund imports, Mahendra Jajoo, the Mumbai-based head of fixed-income investments at Pramerica Asset Managers, a unit of Newark, New Jersey-based Prudential Financial Inc., said before the report.
Cash Crunch

In an indication of cash shortages, lenders borrowed 924.7 billion rupees on average a day in November from the Reserve Bank, almost twice the amount sought in October, according to data compiled by Bloomberg. They borrowed 867.6 billion rupees on average a day this month. Overnight rates surged to 9.15 percent today, the highest level in three years.

The central bank resumed open-market purchases of sovereign debt last month for the first time since January to boost the amount of cash in the banking system. The monetary authority has purchased 243 billion rupees of government debt in auctions over the past month, central bank data show.

“We hope the RBI will now shift its focus to encouraging growth,” Chandrajit Banerjee, director general of the Confederation of Indian Industry, said before the release. “The industrial slowdown is taking very serious dimensions and there is an urgent need to improve sentiment.”

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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