Subbarao Says India Lacks Scope for Stimulus to Counter a Crisis By Anoop Agrawal - Aug 13, 2012

India has no space for economic stimulus to respond to a future crisis partly because it faces elevated inflation, central bank Governor Duvvuri Subbarao said.

“Inflation is high, oil prices though they have come off $100 a barrel are at elevated levels, the external sector is under stress,” Subbarao said in a speech in the southern Indian state of Kerala yesterday. “There is just no space for fiscal or monetary response.”

The Reserve Bank of India left interest rates unchanged in July, breaking with a wave of cuts in borrowing costs from China to Brazil as the global recovery falters. The pace of Indian price rises has held above 7 percent for most of 2011, stoked by food and energy costs and a drop in the rupee, curbing Subbarao’s scope to counter the slowest economic expansion in almost a decade.

“Some sacrifice in growth is inevitable and an unavoidable cost in bringing inflation down,” Subbarao said. Core inflation at 5 percent is “still quite high,” he also said.

The rupee has tumbled about 18 percent against the dollar in the past 12 months, making imports more expensive. It weakened 0.1 percent to 55.3438 per dollar at the 5 p.m. close in Mumbai yesterday. The BSE India Sensitive Index of stocks advanced 0.4 percent. The yield on the 8.15 percent government bond due June 2022 rose to 8.20 percent from 8.16 percent on Aug. 10.

The central bank kept its benchmark repurchase rate at 8 percent last month for a second meeting. Headline inflation probably exceeded 7 percent for a sixth straight month in July, according to the median estimate of 29 economists in a Bloomberg News survey ahead of a report due today.

Growth in Asia’s third-largest economy slowed to 5.3 percent in the three months through March from a year earlier, the least since 2003.

“In other emerging economies, inflation has also come down,” Subbarao said. “In India, even as the growth has come down, our inflation has not come down. India is somewhat of an outlier in the world.”

At the same time, Subbarao also said that India’s long-term growth story remains credible.

To contact the reporter on this story: Anoop Agrawal at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net