 "RBI advisor says rate cut may be possible in March")
The Reserve bank of India (RBI) could consider cutting interest rates as early as March, should inflation cool further after global oil prices fell to a four-year low, an advisor to the monetary authority said.
Reducing the pace of consumer-price gains to four per cent from September's three-year low of 6.46 per cent is achievable, Ashima Goyal, a member of RBI's technical advisory committee that makes policy recommendations to Governor Raghuram Rajan, said without specifying a timeframe. Cheaper crude oil would also help the government cut subsidies and support its efforts to narrow the Budget shortfall, she said.
"The drop in oil prices is a definite positive for India as it will help reduce the deficits and inflationary impulses," Goyal said in a phone interview from Mumbai on Monday. "Various factors are coming together to enable the RBI to support the growth process by lowering interest rates." Consumer-price gains have decelerated from as much as 11.2 per cent in November 2013 after the central bank raised rates even amid an economic slowdown. A 24 per cent slump in Brent crude since June 30 helped cut India's import costs, boosting the odds of further declines in the inflation rate. Standard & Poor's upgraded the sovereign credit outlook last month, citing reduced cost pressures and a government plan to reduce the budget deficit to a seven-year low.
The yield on India's benchmark 10-year sovereign notes fell two basis points to 8.34 per cent, the lowest since September 2013, after Goyal's comments. One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell 11 basis points to 7.97 per cent, the least since July 2013, according to data compiled by Bloomberg.
RBI has kept its repurchase rate at eight per cent, after three increases from September 2013 through January. A cut would be the first since May 2013.
"Real interest-rates are becoming more and more positive, which would be severely disinflationary, and that means we have to cut rates," said Goyal.
Lower energy costs have emboldened Prime Minister Narendra Modi's administration to step up efforts to cut fuel subsidies and shore up public finances. Over the weekend, the government freed diesel prices from state control for the first time in more than a decade and raised natural gas tariffs. India imports almost 80 per cent of its oil.
Favourable circumstances
"The combination of circumstances, with the government committed to the fiscal-deficit target, taking various supply-side initiatives and the central bank remaining focused on anchoring inflation expectations, suggests we can see a sustainable softening in inflation," said Goyal. "At present, inflation seems to be coming off faster, but growth is not picking up as much." The nation's gross domestic product will rise 5.5 per cent in the financial year through March 2015, RBI predicts. While that would exceed the previous period's 4.7 per cent, it's still slower than the average 8.7 per cent pace achieved during the 2006-2010 period.
"The government's move to deregulate diesel prices, aided by a drop in oil prices, will curb inflation and help the economy revive at a faster pace," said Killol Pandya, a senior fixed-income fund manager at LIC Nomura Mutual Fund Asset Management Co in Mumbai. "Slower inflation and a reduced Budget deficit will give the RBI elbow room to cut rates soon."
Best performers
Indian government bonds have handed investors Asia's best gains this year amid speculation the central bank is moving toward lowering borrowing costs. Rupee debt returned 11.1 per cent this year, beating gains of 9.5 per cent on Indonesian notes and 9.3 per cent on Chinese securities, according to indexes compiled by Bloomberg.
Ten-year yields in India have slid 49 basis points, or 0.49 percentage point, in 2014. JPMorgan Asset Management predicts it will drop to as low as eight per cent next quarter, while Nomura Holdings Inc forecasts a decline to 8.20 per cent.
While India's inflation has slowed, it remains the highest among Asia's major economies. That, combined with the impact of a potential US interest-rate increase, could weaken the rupee, Goyal said. The local currency, which has gained 0.7 per cent this year to 61.36 to a dollar, may trade between 60 and 63 through March, she said.
India is better placed to face the impact of US policy changes than last year after the nation's foreign reserves increased, according to Goyal. The stockpile climbed $32 billion in the past year to $313 billion.
The rupee, which plunged to a record low of 68.8450 per dollar in August 2013 after the Federal Reserve signalled it was planning to taper bond purchases, has since rallied 12 per cent.
'Too much capital'
A rate cut may also be needed as a surge in inflows amid a pick-up in growth would make it difficult to manage the exchange rate, according to Goyal. Indian 10-year bonds pay 619 basis points more than similar-maturity US Treasuries, according to data compiled by Bloomberg.
Global funds have already ploughed an unprecedented $21 billion into Indian bonds so far in 2014, while the stock market saw inflows of $13 billion, exchange data show.
"Our interest rates are pretty high and our inflation is falling, so actually there is a huge traction for flows into India," said Goyal. "That's another reason we should decrease our rates because, if rupee is expected to strengthen, inflation is coming down and growth is high, you can't have such a high interest-rate differential. It'll attract too much capital."
Reducing the pace of consumer-price gains to four per cent from September's three-year low of 6.46 per cent is achievable, Ashima Goyal, a member of RBI's technical advisory committee that makes policy recommendations to Governor Raghuram Rajan, said without specifying a timeframe. Cheaper crude oil would also help the government cut subsidies and support its efforts to narrow the Budget shortfall, she said.
"The drop in oil prices is a definite positive for India as it will help reduce the deficits and inflationary impulses," Goyal said in a phone interview from Mumbai on Monday. "Various factors are coming together to enable the RBI to support the growth process by lowering interest rates." Consumer-price gains have decelerated from as much as 11.2 per cent in November 2013 after the central bank raised rates even amid an economic slowdown. A 24 per cent slump in Brent crude since June 30 helped cut India's import costs, boosting the odds of further declines in the inflation rate. Standard & Poor's upgraded the sovereign credit outlook last month, citing reduced cost pressures and a government plan to reduce the budget deficit to a seven-year low.
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Bonds, swaps
The yield on India's benchmark 10-year sovereign notes fell two basis points to 8.34 per cent, the lowest since September 2013, after Goyal's comments. One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell 11 basis points to 7.97 per cent, the least since July 2013, according to data compiled by Bloomberg.
RBI has kept its repurchase rate at eight per cent, after three increases from September 2013 through January. A cut would be the first since May 2013.
"Real interest-rates are becoming more and more positive, which would be severely disinflationary, and that means we have to cut rates," said Goyal.
Lower energy costs have emboldened Prime Minister Narendra Modi's administration to step up efforts to cut fuel subsidies and shore up public finances. Over the weekend, the government freed diesel prices from state control for the first time in more than a decade and raised natural gas tariffs. India imports almost 80 per cent of its oil.
Favourable circumstances
"The combination of circumstances, with the government committed to the fiscal-deficit target, taking various supply-side initiatives and the central bank remaining focused on anchoring inflation expectations, suggests we can see a sustainable softening in inflation," said Goyal. "At present, inflation seems to be coming off faster, but growth is not picking up as much." The nation's gross domestic product will rise 5.5 per cent in the financial year through March 2015, RBI predicts. While that would exceed the previous period's 4.7 per cent, it's still slower than the average 8.7 per cent pace achieved during the 2006-2010 period.
"The government's move to deregulate diesel prices, aided by a drop in oil prices, will curb inflation and help the economy revive at a faster pace," said Killol Pandya, a senior fixed-income fund manager at LIC Nomura Mutual Fund Asset Management Co in Mumbai. "Slower inflation and a reduced Budget deficit will give the RBI elbow room to cut rates soon."
Best performers
Indian government bonds have handed investors Asia's best gains this year amid speculation the central bank is moving toward lowering borrowing costs. Rupee debt returned 11.1 per cent this year, beating gains of 9.5 per cent on Indonesian notes and 9.3 per cent on Chinese securities, according to indexes compiled by Bloomberg.
Ten-year yields in India have slid 49 basis points, or 0.49 percentage point, in 2014. JPMorgan Asset Management predicts it will drop to as low as eight per cent next quarter, while Nomura Holdings Inc forecasts a decline to 8.20 per cent.
While India's inflation has slowed, it remains the highest among Asia's major economies. That, combined with the impact of a potential US interest-rate increase, could weaken the rupee, Goyal said. The local currency, which has gained 0.7 per cent this year to 61.36 to a dollar, may trade between 60 and 63 through March, she said.
India is better placed to face the impact of US policy changes than last year after the nation's foreign reserves increased, according to Goyal. The stockpile climbed $32 billion in the past year to $313 billion.
The rupee, which plunged to a record low of 68.8450 per dollar in August 2013 after the Federal Reserve signalled it was planning to taper bond purchases, has since rallied 12 per cent.
'Too much capital'
A rate cut may also be needed as a surge in inflows amid a pick-up in growth would make it difficult to manage the exchange rate, according to Goyal. Indian 10-year bonds pay 619 basis points more than similar-maturity US Treasuries, according to data compiled by Bloomberg.
Global funds have already ploughed an unprecedented $21 billion into Indian bonds so far in 2014, while the stock market saw inflows of $13 billion, exchange data show.
"Our interest rates are pretty high and our inflation is falling, so actually there is a huge traction for flows into India," said Goyal. "That's another reason we should decrease our rates because, if rupee is expected to strengthen, inflation is coming down and growth is high, you can't have such a high interest-rate differential. It'll attract too much capital."