Business: Mar 15, 2012

India's central bank left interest rates unchanged for the third straight meeting after inflation accelerated, and as expected steps to curb the fiscal deficit in the budget tomorrow.

The Reserve Bank of India kept the repurchase rate at 8.5 percent, it said in a statement in Mumbai today. The result was predicted for 19 out of 22 economists in a Bloomberg News survey, with three predicting a quarter-point reduction. He reiterated that future actions will be lowering taxes.

India joins nations Indonesia to South Korea in keeping borrowing costs this month, juggling price pressures with the need to avoid a deeper growth slowdown as investment falls and European debt crisis hurts exports. The central bank has signaled tax cuts to counter the weakest expansion in almost three years depends on a sustained easing in inflation and moves to curb the biggest budget gap between the BRIC economies.

"Oil prices and the decline of the currency pose a huge concern for the inflation trajectory," said Anubhuti Sahay, economist at Standard Chartered Plc in Gurgaon, near New Delhi. "The RBI wants to see an indication of a reduction in the fiscal deficit in the budget tomorrow before embarking on cutting taxes."

India's benchmark bonds extended a decline and the rupee weakened after the decision. The yield on the 8.79 percent note due November 2021 was 8.36 percent as of 1:35 pm in Mumbai, according to the central bank trading system, compared with 8.29 percent before the announcement. The rupee fell 0.8 percent to 50.325 to the dollar, while the stock index fell 1.6 percent.
Inflation Risks

"Recent growth dynamics inflation has already prompted the Reserve Bank to indicate that no more tightening is needed and that future actions will be to lower the rates," he said in today's statement. "However, despite the deceleration in growth, inflation risks remain, which affect both the timing and magnitude of future rate actions."

The monetary authority also said "upside risks" to inflation increased from the last surge in crude oil, "fiscal slippage" and rupee depreciation. He added, "credible fiscal consolidation" will be "important factor" in the configuration of the inflation outlook.

Growth in the $ 1.7 trillion economy slowed for the fourth consecutive quarter of year before in the three months to December. GDP likely to climb 6.9 percent this fiscal year, the fewest since 2009, the government forecasts.
Do not Delay Cuts

"Even though there are risks of oil, the fiscal deficit and the rupee's decline, the huge growth slowdown requires that the RBI starts cutting rates," said Indranil Sen Gupta, a Mumbai-based economist at Bank of America Merrill Lynch. "I do not think they can postpone tax cuts beyond April."

India's fiscal deficit will reach 6.1 per cent of the gross domestic product in the year through March 2012, according to Nomura Holdings Inc., defeating Minister Pranab Mukherjee plan to contain it 4.6 percent. Slow expansion sapped tax receipts such as grants and job guarantee program for rural workers will stimulate spending.

Inflation was 6.95 percent in February, quickening for the first time in five months after exceeding 9 per cent for most of 2011. The central bank predicts a gain in the benchmark wholesale-price index of 7 percent from March.
BRIC's Fastest

The monetary authority raised borrowing costs by a record 3.75 percentage points from 2010 to October last year to combat price rises. The RBI unexpectedly cut the amount of deposits lenders need to separate as reserves on January 24 and March 9, to relieve an effective Squeeze, lowering the cash reserve ratio combined 1.25 percentage points to 4.75 percent.

Inflation in Asia's third largest economy is still the fastest in the BRIC group, which also includes Brazil, Russia and China, eroding purchasing power in a nation where more than two-thirds of the population lives on less than $ 2 per day.

Tata Motors, the country's largest maker of value, raised car prices as 12,000 rupees ($ 239) on Feb. 8. Indian Railways, Asia's oldest network, plans to raise passenger fares for the first time in a decade.

Brent crude, the benchmark for almost all India's imports, jumped about 17 percent so far this year. India imports three-fourths of its oil.
'Unjustified'

"It is unjustified to wait for the RBI to start cutting rates given the risks to inflation from high oil prices and fiscal slippage," said Deepali Bhargava, Mumbai-based chief India economist at Espirito Santo Securities.

India's gross domestic product may rise as 7.85 percent in the year starting April 1, Mukherjee's advisers said in a report today. The annual Economic Survey said the government should lead and cap subsidies it pays for food grains, fertilizers and fuels including diesel.

Investors of ICICI Securities Primary Dealership Ltd. to Yes Bank Ltd (YES) to predict Mukherjee announced steps to cut the deficit to 5 per cent of the GDP in the year to March 2013 rather than ramp up spending to aid expansion, a Bloomberg survey showed.

Gross fixed capital formation, a measure of investment in items such as factories and roads, fell 1.2 percent last quarter from a year earlier, after a 4 percent tumble.

Prime Minister Manmohan Singh tries to keep economic change that began in 1990. His ruling Congress Party was routed in regional elections this year.

Allegations of graft against officials, inflation and policy reversals to be injured Singh's agenda. Among the setbacks was the suspension in December of plans to open up India's retail industry to foreign companies such as Wal-Mart Stores Inc. (WMT)

"What India needs is quickly put in place all the policy reforms if it wants to accelerate growth to more than 8 percent," said Jay Shankar, an economist at Religare Capital Markets Ltd. in Mumbai. "Unfortunately, the government is weakened after the state elections."

Business

Thursday, March 15, 2012

Union Budget 2012: Growth, fiscal consolidation top challenges

India Holds Rate for Third Meeting as Inflation Accelerates

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