India Holds Interest Rates as Rupee’s Plunge Threatens to Stoke Inflation

India, June 17 – India left interest rates unchanged after a plunge in the rupee to a record low threatened to stoke inflation in Asia’s third-largest economy.

Governor Duvvuri Subbarao kept the repurchase rate at 7.25 percent as 15 of 25 analysts in a Bloomberg News survey predicted, a Reserve Bank of India statement showed in Mumbai today. Ten called for a fourth straight cut of 25 basis points.

The rupee’s fall of about 6 percent versus the dollar this quarter is among the steepest in Asia and may fan import costs in a country with the second-highest consumer inflation in the Group of 20 nations. The currency has been weighed down by an unprecedented current-account deficit that Subbarao has said is the biggest risk in an economy hurt by moderating investment.

“Rupee stability is a crucial pre-condition to even begin considering policy easing,” Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore, said before the decision. “You can’t rein in prices and deficits in the absence of currency stability.”

The rupee slid 0.8 percent last week to 57.5287 per dollar and touched an all-time low of 58.985 on June 11. The yield on the 8.15 percent bond due June 2022 rose 12 basis points to 7.53 percent in the period, while the S&P BSE Sensex index ended down 1.3 percent.

Stocks and currencies have slid in nations from Brazil to the Philippines on concern the U.S. could pare monetary stimulus if its jobs market shows sustained improvement.
RBI Guidance

India’s monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the Reserve Bank said, adding it stands ready to “respond rapidly and appropriately to any adverse developments.”

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” the monetary authority said. “While several measures have been taken to contain the current-account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows.”

Subbarao lowered borrowing costs in January, March and May to boost investment in an economy that expanded a decade-low 5 percent last fiscal year.

India’s wholesale-price index rose 4.7 percent in May from a year earlier, a 43-month low. At the same time, a separate consumer inflation gauge advanced 9.31 percent, the fastest after Argentina in the G-20, data compiled by Bloomberg show.

The central bank today flagged “upside” pressures from rupee depreciation, food costs and recent increases in prices administered by the government.
Foreign Investment

Finance Minister Palaniappan Chidambaram signaled last week that more caps on foreign-direct investment may soon be eased, as he tries to extend a nine-month government drive to revitalize the economy and avert a credit-rating downgrade.

He’s striving to woo funds to finance the current-account gap, which swelled to $32.6 billion in the last quarter of 2012, or 6.7 percent of gross domestic product. Gold and oil imports have contributed to the shortfall.

Prime Minister Manmohan Singh began policy changes in September. The steps included paring the budget deficit, easing rules in the retail and aviation industries to lure overseas capital and speeding up approvals for infrastructure projects.

Fitch Ratings revised India’s credit-outlook to stable from negative on June 12. That provided some succor for Singh, whose coalition has been hurt by graft scandals and depressed growth.

Domestic sales in India’s passenger-car industry, which includes companies such as Maruti Suzuki India Ltd., fell 12.3 percent in May from a year earlier, in a sign of subdued demand.

The economy may expand 5.7 percent in the fiscal year through March 2014, the Reserve Bank said in May.

Singh is under pressure to bolster growth in a nation where World Bank data shows about two-thirds of the 1.2 billion population lives on less than $2 per day.

“India needs to accelerate the pace of reforms to send a clear message to investors that it can safely navigate through the choppy waters,” said Arun Singh, an economist at Dun & Bradstreet Information Services India Pvt. in Mumbai.

Via:BLOOMBERG