India’s central bank will keep interest rates at close to four-year highs when it meets on Tuesday despite mounting anxiety over cooling growth in Asia’s third-largest economy, analysts say.
While other developing nations from Brazil to Indonesia have cut rates to shield their economies from the global downturn, India’s worries over inflation are likely to leave the cost of borrowing unchanged.
The Reserve Bank of India has “emphasized that upside risks to inflation remain” and that it would be “premature” to begin cutting interest rates at the policy-setting meeting, HSBC economist Lief Eskesen said.
The bank has hiked rates 13 times since March 2010 — the most aggressive pace of monetary tightening among its global peers — before going into pause mode late last year amid concerns over faltering growth.
Inflation has dropped from near-double digits to 7.47 percent, but economists say the downward trend is not entrenched enough to prompt a rate rollback.
The bank is, however, expected to strike a more dovish tone with “growth concerns now predominating,” said Moody’s Analytics economist Glenn Levine, who echoed other analysts in predicting a possible rate cut in March.
Indian Finance Minister Pranab Mukherjee in the past week insisted that India’s “economic fundamentals are strong,” but warned the economy faced a “difficult” period.
The government is now projecting growth of around 7 percent for the financial year to March 2012, down from the 9 percent forecast in the budget. The economy grew by 8.5 percent last year.
Some economists believe the final growth figure will be slightly lower — in the mid to upper six-percent range.
India’s economy has staggered under the brunt of the 13 rate rises that have pushed the central bank’s benchmark interest rate to 8.5 percent — its highest level since July 2008.
While India’s projected growth remains enviable by Western standards, it is too slow to fulfill government pledges of significant poverty reduction and to create enough jobs for a soaring young workforce in the country of 1.2 billion.
The slowdown is also playing havoc with Mukherjee’s fiscal deficit reduction targets.
Economists say public finances are deteriorating with a rising subsidy bill, lower-than-expected tax revenues and privatization earnings, as well as mounting public borrowing.
The government has raised just 3 percent of its 400 billion rupee (US$7.9 billion) target from the sale of holdings in state-owned firms this financial year — partly due to a bearish stock market.
The government’s top financial adviser, C. Rangarajan, says it will now be a “Herculean task” to cut the budget deficit to the targeted 4.6 percent of GDP. The deficit, which stood at 6.7 percent of GDP in the first half of 2011-2012, has emerged as a key concern of economists who say it could be as high as 7 percent for the full year — spelling higher borrowing and bigger interest payments. The deficit was 4.7 percent a year ago.
Adding to the gloom is perceived paralysis in the Congress-led government, which has postponed major economic reforms as it fights numerous corruption scandals that have damaged the reputation of Indian Prime Minister Manmohan Singh.