Wed, Jan 30, 2013 - Page 15 News List

India cuts rates to spur growth as inflation cools

TRAILBLAZER:India is the first major economic power in the region to cut rates, as inflation hit a three-year low, creating space for monetary policy easing, analysts said

Bloomberg

Laborers work at a building on Sunday in Mumbai, India.

Photo: AFP

India lowered interest rates for the first time since April last year and cut the amount of deposits lenders must set aside as reserves, easing policy to aid growth as inflation cools and the Indian government curbs the budget deficit.

The Reserve Bank of India reduced the repurchase rate to 7.75 percent from 8 percent, it said yesterday in Mumbai, as 30 out of 35 analysts in a Bloomberg News survey had predicted. Four expected a cut to 7.5 percent and one said there would be no change.

Reserve Bank of India Governor Duvvuri Subbarao cut the cash reserve ratio to 4 percent from 4.25 percent, effective on Feb. 9, adding 180 billion rupees (US$3.35 billion) into the banking system.

India is the first major Asian economy to ease borrowing costs this year, after inflation moderated to a three-year low and the government called for cheaper credit as it vows prudence in next month’s budget to dampen price pressures.

While the cost of living is still rising by more than 7 percent, the central bank sa id there is space — “albeit limited” — to spur expansion as it cut the inflation forecast.

“Easing inflation and a better fiscal situation are creating space to cut rates,” Axis Bank Ltd economist Saugata Bhattacharya said in Mumbai. “The central bank will be cautious in further easing due to concerns over elevated inflation, high current account and fiscal deficits.”

The yield on the 8.15 percent government bond due in June 2022 fell three basis points after the rate decision. It was 7.87 percent at 11:24am in Mumbai, compared with 7.90 percent earlier and little changed from Monday. The BSE India Sensitive Index rose 0.4 percent, while the rupee gained 0.5 percent to 53.66 per US dollar.

The rupee has strengthened more than 1 percent against the US dollar since the middle of September last year, when Indian Prime Minister Manmohan Singh began a policy overhaul to contain subsidies, lure foreign investment and speed up infrastructure projects.

“There is an increasing likelihood of inflation remaining range-bound around current levels going into 2013 to 2014,” the central bank said. “This provides space — albeit limited — for monetary policy to give greater emphasis to growth risks.”

The central bank added that the policy guidance will be “conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits.”

India’s economy will expand 5.5 percent in the year through March, less than an earlier estimate of 5.8 percent, the central bank said. The prediction for wholesale price inflation was cut to 6.8 percent from 7.5 percent.

Five of 28 analysts in a Bloomberg survey predicted the reserve ratio cut — the fifth since last year — with the rest seeing no change.

“High inflation, a volatile exchange rate and commodity prices pose huge macroeconomic risks,” Bank of Baroda economist Rupa Rege Nitsure said in Mumbai.

India partially freed diesel prices from state control on Jan. 17 to curb fuel subsidies, in line with recent policy steps. A rise of 0.45 rupees a liter every month until March next year will add about 64 basis points to inflation and lower the budget gap by 14 basis points, Nomura Holdings Inc said.

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