IMF Says India Should Hold Rates Until Inflation Curbed

By Unni Krishnan - Feb 6, 2013

India’s central bank should refrain from cutting interest rates until inflation is contained even as the nation faces a subdued economic recovery, according to the International Monetary Fund.
“With policy space strictly circumscribed because of high fiscal deficit and elevated inflation, the economy is in a weaker position than before the global financial crisis,” the IMF said in a statement released yesterday. “It is advisable to maintain the current level of policy rates until inflation is clearly on a downward trend.”
Gross domestic product will climb 5.4 percent in the 12 months through March 2013, and 6 percent the following fiscal year, the Washington-based lender said. Inflation will ease to 7.2 percent by March 2014 from 7.8 percent in March this year, while the budget deficit may be 5.6 percent of GDP this fiscal year, above the government’s 5.3 percent goal, it added.
India’s Finance Minister Palaniappan Chidambaram has vowed to pare the budget shortfall to damp prices, part of a wider policy overhaul since mid-September to revive confidence in Asia’s No. 3 economy. Inflation exceeding 7 percent has limited the central bank to two interest-rate cuts since the start of April last year, even as a government report today may estimate growth has slid to a decade low.

Easing Delayed

“The IMF is highlighting a similar stance as what the Reserve Bank of India governor has been saying, that room for easing is limited because of the twin deficits and high inflation,” said Rohit Arora, a fixed-income strategist at Barclays Plc in Singapore. “The possibility of easing in March is getting lower and may be delayed.”

The rupee has strengthened about 4 percent against the dollar since Prime Minister Manmohan Singh began the policy changes to contain energy subsidies, lure foreign investment and speed up infrastructure projects.
Singh is trying to narrow the budget deficit and a current- account shortfall and avert a credit-rating downgrade.
Efforts to facilitate investment and “slightly” stronger global growth will lead to a “modest rebound” in near-term Indian expansion, the IMF said. “Structural reforms, fiscal consolidation, and low inflation” are seen as key to a sustained recovery and to lower “vulnerabilities,” according to the lender.

Growth Risks

While the climb in the country’s GDP remains one of the highest in the world, risks are on the downside, the IMF said.
Indian authorities, in discussions with IMF staff, said they plan to continue to focus on liberalizing capital inflows “with a view to facilitating the financing of infrastructure and building the corporate bond market,” according to a report released along with the statement.
The Indian officials also said the statutory liquidity ratio, or the proportion of deposits lenders must keep in government bonds, may be “further recalibrated in accordance with evolving monetary and fiscal conditions.”
The Reserve Bank of India cut the ratio to 23 percent from 24 percent, effective Aug. 11 last year, the first such reduction since 2010. It lowered the repurchase rate to 7.75 percent from 8 percent last month, while signaling the space for further easing is limited.
The government will estimate 5.5 percent GDP growth for the 12 months through March 2013, according to a Bloomberg News survey of analysts before a report due today. That would be the slowest since 2002-2003.

Taiwan Exports

The IMF statement and report were released after so-called Article IV talks with Indian officials.
Elsewhere in Asia today, Taiwan’s exports probably rose 23.2 percent in January from a year earlier, according to the median estimate in a Bloomberg News survey after a 9 percent gain in December.
Australian employers added part-time jobs in January and fewer people hunted for work, helping keep the unemployment rate unchanged, a report showed today, as interest rates at a half- century low support hiring.
The European Central Bank will probably keep its benchmark interest rate unchanged at a record low of 0.75 percent, according to a Bloomberg survey. The Bank of England will also hold its benchmark interest rate at 0.5 percent, a separate survey showed.
Spain, the U.K. and Germany will probably report declines in industrial production in December compared with a year earlier, according to the median estimates in Bloomberg surveys. Initial jobless claims in the U.S. probably fell to 360,000 in the week ended Feb. 2 from 368,000 the previous week, a separate survey showed before a report today.
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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