RBI hints at Indian rate cut

Posted on June 4, 2012

The Reserve Bank of India has “elbow room” to cut interest rates to boost the country’s waning growth, said Subir Gokarn, deputy central bank governor.

His comments came days after India became the latest emerging market to see its once buoyant growth suffer a sharp slowdown, sparking fears that the country could face an economic crisis. The slowdown and rising inflation had lead many analysts to believe there was little room for manoeuvre from the RBI.

    “[There are] two factors that suggest there is room for a rate cut: the slowdown in growth and the fall in oil prices,” Mr Gokarn said on Monday. “I think the [crude oil price] levels that we are seeing today $97-$98 per barrel are somewhat lower than most people anticipated maybe a month or two ago. So that is providing some room.”

    Official data showed that India’s gross domestic product in the first three months of this year grew 5.3 per cent – the slowest rate in almost a decade. Observers blamed a combination of parliamentary paralysis and high interest rates, which chocked investment, for the drop in growth which 12 months earlier had been 9.2 per cent

    Mr Gokarn, however, emphasised that it was essential the government acted promptly to reduce the country’s fiscal deficit, which stood at 5.7 per cent of GDP in the year ending March 31.

    “We need to see some corrective action on that [the deficit],” he told reporters on the sidelines of an investor conference in Mumbai.

    Robert Prior-Wandesforde, director of Asian economics at Credit Suisse, said there would be growing pressure on the RBI to cut rates aggressively. Some analysts said, however, that the acceleration of food inflation and a weak rupee made it difficult for the central bank to cut its benchmark interest rate of 8 per cent.

    The rupee, which closed on Monday at Rs55.65 against the dollar, has depreciated by about 13.5 per cent against the US currency since November – making it one of the worst performing emerging market currencies. Meanwhile, inflation, which had fallen below 7 per cent following the RBI’s aggressive monetary tightening policy, has now climbed to 7.2 per cent.

    India’s dismal economic data in the three moths ending March 31, led several investment banks to downgrade their 2012-13 annual growth outlooks for India. Morgan Stanley cut its forecast to 5.7 per cent, down from 6.3 per cent, while Standard Chartered cut its to 6.2 per cent from 7.1 per cent.

    “There is rising hope for quick monetary policy action supporting the growth outlook, but we believe the current stagflation-type environment will make quick effective reduction of cost capital difficult,” Morgan Stanley analysts said in a report.

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