Subbarao Seeks to Assure Investors on Prices, Aid India Rebound

Jan. 30 (Bloomberg) -- India’s central bank Governor Duvvuri Subbarao sought to assure investors that he will restrain inflation, while refraining from raising interest rates to support a rebound in Asia’s third-largest economy.

The Reserve Bank of India yesterday left benchmark rates unchanged and instead boosted the ratio of deposits lenders must hold in reserve by more than forecast, to 5.75 percent. The step is part of a gradual tightening of monetary policy that will lead to higher borrowing costs in coming months, said Rajeev Malik, a regional economist at Macquarie Group Ltd.

The goal is to secure a recovery in economic growth toward 8 percent this year while containing a surge in inflation that would impoverish households and drive up longer-term bond yields. Subbarao, 60, is emulating a course taken across the region, with nations from China to the Philippines taking steps toward higher borrowing costs without rushing to raise rates.

“The Reserve Bank of India has embarked on a handle-with- care monetary exit,” said Singapore-based Malik. “While inflation has become more important, it has not taken its eyes off growth dynamics.”

Malik expects the central bank to raise interest rates by between 1 and 1.5 percentage points over the next year, starting in either March or April.

India’s generic 10-year government bond yields reached 7.71 percent on Jan. 13, the highest level since November 2008, and closed at 7.58 percent yesterday in Mumbai.

‘Keeping a Vigil’

“Bond yields haven’t reacted much and are likely to remain stable,” said Jayesh Mehta, country treasurer and head of fixed income at Bank of America Corp. in India. “The RBI has been keeping a vigil on inflation and had announced its intentions several months back.”

India’s benchmark stock index gained 0.3 percent yesterday, reversing earlier losses, after the central bank predicted faster growth. The rupee gained 0.4 percent to 46.18 against the dollar from 46.36.

Subbarao expects India’s economy to grow 7.5 percent in the year to March 31 from the 6 percent forecast earlier as demand for manufactured goods and services rise. He also raised the bank’s inflation forecast to 8.5 percent by March 31 from 6.5 percent.

As a result, the cash reserve ratio was raised from 5 percent while the benchmark reverse repurchase rate was kept unchanged at 3.25 percent and the repurchase rate at 4.75 percent yesterday.

Currency Gains

Analysts anticipate currency gains as strengthening economies force central banks to act. The rupee may gain almost 8 percent by year-end to 43 per dollar, according to the median forecast in Bloomberg survey. China’s yuan and Malaysia’s ringgit are estimated to advance 3.7 percent.

China, Malaysia and the Philippines moved closer to raising interest rates in January.

In China, the central bank ordered some banks to pare lending, raised the ratio for deposits banks must set aside as reserves and guided bill yields higher this month after loan growth surged.

Malaysia kept borrowing costs unchanged on Jan. 26, while warning that rates cannot be kept “too low” for too long because of the need to prevent a build-up of “financial imbalances.” The Philippines increased its so-called rediscounting rate, one of the interest rates it charges lenders for borrowing money from the central bank.

Robust Growth

“The growth in emerging-market economies such as China and India is expected to be robust,” Subbarao said yesterday. He said India could sustain 7.5 percent growth in the next financial year starting April 1.

The International Monetary Fund on Jan. 26 boosted its 2010 gross domestic product growth projection for India to 7.7 percent from the 6.4 percent forecast in October.

India’s growth prospects are luring investments. Bridgestone Corp. said Jan. 29 that a subsidiary in India will begin production of radial tires for buses and trucks in the first half of 2011 to tap growing demand in the country. The Tokyo-based company will invest 3.3 billion yen ($36 million), for daily production of 400 units, it said.

Cisco Systems Inc. Chief Executive Officer John Chambers told CNBC in Davos Jan. 29 that he would be “not surprised” if China and India grew between 7 percent and 10 percent in 2010.

Subbarao said his objective is to “anchor” inflation expectations without hurting growth.

“The central bank has to balance growth versus inflation because in a country like India, inflation is sometimes more important than growth,” said Anil Singhvi, vice chairman of Reliance Natural Resources Ltd., a unit of India’s third-largest utility.

Inflation is politically sensitive in India as it hurts the poor the most. The Food & Agriculture Organization says 231 million people in the country are undernourished, more than in Sub-Saharan Africa. Prime Minister Manmohan Singh’s government is under pressure to tame inflation after opposition parties stepped up their criticism of his administration for failing to curb price gains.