RBI is trying to do a balancing act by controlling inflation and at the same time ensuring growth.
Reserve Bank of India Governor Duvvuri Subbarao said inflation concerns persist, adding pressure on the central bank to do more to support economic growth.
“We can’t drop our guard on controlling inflation,” Subbarao told reporters in Mumbai today. “We have to balance the concerns of preserving financial stability, maintaining price stability and sustaining growth.”
Subbarao yesterday kept interest rates unchanged and signaled he may hold borrowing costs steady in coming weeks as inflation remains a concern, triggering a plunge in stocks and bonds. A weaker rupee may raise import costs and stoke inflation, Subbarao said today.
“The RBI’s status-quo on interest rates held a surprise element for a certain segment of the market,” said Namrata Padhye, an economist at IDBI Gilts in Mumbai. “Easing of interest rates at this juncture would have only hurt the rupee.”
India’s rupee dropped for the 11th week yesterday, the longest losing streak since December 2005, as the nation’s benchmark share index plunged the most in four years on signs that global economies are headed for a recession.
The rupee slid as much as 0.7 percent to 50.165 per dollar, an all-time low, before closing at 49.96 in Mumbai yesterday. The Sensitive index plunged 11 percent.
The governor yesterday held the repurchase rate at 8 percent, after lowering it by 1 percentage point on Oct. 20. He also kept the cash reserve ratio, or the proportion of deposits lenders need to set aside as reserves, at 6.5 percent after cutting it by 2.5 percentage points since Oct. 11.
Lower growth forecast
Subbarao also cut India’s growth forecast to between 7.5 percent and 8 percent for the year to March 31, from the 8 percent estimated in July.
He kept the inflation estimate unchanged at 7 percent by March 31, while betting the decline in commodity prices will slow price increases. India’s key wholesale price inflation is 11.07 percent, more than double the 5 percent aim of the central bank.
India will be “much less” influenced by a global recession than many other countries because growth in the nation’s $1.2 trillion economy, Asia’s third-largest, is driven by domestic consumer demand, Subbarao said.
“In a globalising world, where financial integration is so deep, it is futile to think that any country can be decoupled” from a global recession, Subbarao said. “Having said that, if there is any major emerging economy that can decouple, it is India.”
The governor said he has “concerns” on the inflation front.
Inflation to decline
“In a mathematical sense, inflation is coming down, and indeed, when we project 7 percent inflation by March, we believe it will continue to decline,” Subbarao said.
While wholesale price inflation is the key price index in India, the central bank also studies trends in the consumer prices, he said.
Consumer prices for agriculture and rural labour have risen by 11 percent, while that for industrial workers is at 9 percent, Subbarao said.
While the winter crop harvest is “promising,” the forecast for production is 115 million tons, lower than the 121 million tons estimated earlier, he said.
Oil prices are also subject to volatility, the governor said.
“If supply is cut as the OPEC did yesterday, or the dollar weakens, then there is upward pressure on oil,” Subbarao said. “On the other hand, if recession is weaker than it is, then there will be downward pressure. So we don’t know how these forces will play.”
The author is a Bloomberg News columnist. The opinions expressed are his own.
