June 18, 2012 12:48 AM CT
India unexpectedly left interest rates unchanged as the fastest inflation among the biggest emerging markets narrows scope to bolster a struggling economy.
Governor Duvvuri Subbarao left the benchmark repurchase rate at 8 percent, the Reserve Bank of India said in a statement in Mumbai today. Only four of 25 economists in a Bloomberg News survey predicted the outcome, with 19 expecting a 0.25 percentage-point cut and the remainder a half-point reduction.
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI). Photographer: Adeel Halim/Bloomberg
The decision contrasts with rate cuts in Brazil and China in the past three weeks as the impact of Europe’s turmoil fans through Asia and dominates the agenda of a Group of 20 summit starting in Mexico today. Subbarao’s room to counter the weakest Indian growth in almost a decade is being limited in part by a plunge in the rupee, which has stoked an inflation rate already above 7 percent.
“It’s prudent to pause at this moment as risks to inflation are strong,” Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai, said before the decision. “There is little the Reserve Bank can do to revive growth. The onus is now on the government.”
The rupee traded at 55.5075 against the dollar from 55.4975 earlier. The BSE India Sensitive Index extended its decline, dropping 0.6 percent as at 11:05 a.m. in Mumbai. The yield on the 8.79 percent bond due November 2021 rose five basis points, or 0.05 percentage point, to 8.12 percent from 8.07 percent. Asian stocks advanced today on optimism the outcome of the Greek election has reduced the risk of a breakup of the 17-nation euro area, with the MSCI Asia Pacific Index climbing 1.5 percent as of 2:42 p.m. in Tokyo.
“While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent with sustainable growth,” the central bank said today. “Importantly, retail inflation is also on an uptrend.”
The Reserve Bank said “future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks,” adding it “stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments” amid global risks.
India’s consumer prices rose 10.36 percent in May from a year earlier, a report showed today.
Indian Prime MinisterManmohan Singh is grappling with an economy set back by trade and budget deficits, corruption scandals and infighting in the ruling coalition that has stymied his efforts to lure more foreign investment to ease bottlenecks.
Gross domestic product rose 5.3 percent in the three months through March from a year earlier, the least since 2003, imperiling the prime minister’s goal of 9 percent annual gains to cut poverty. Standard & Poor’s has warned it may demote India’s credit rating to so-called junk status.
Inflation accelerated to 7.55 percent in May, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China. The government’s projected fiscal deficit of 5.1 percent of GDP in the year through March 2013 is the group’s widest.
“We’ll have a combination of weak growth and still-high inflation for longer,” said Rajeev Malik, a senior economist at CLSA Asia-Pacific Markets in Singapore. “The political will to implement solutions is still missing.”
The Reserve Bank lowered rates on April 17 for the first time since 2009, to 8 percent from 8.5 percent. It said at the time the weaker rupee, energy costs and India’s fiscal deficit posed inflationary risks that my limit room for further cuts.
The central bank in January and March also reduced the amount lenders need to set aside as reserves by a combined 125 basis points, to 4.75 percent, to ease cash shortages at banks.
“Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly investment, with the role of interest rates being relatively small,” the central bank said today. “Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.”
The government’s setbacks include the suspension in December of plans to allow foreign companies such as Wal-Mart Stores Inc. to open supermarkets after a coalition ally objected.
Growth in Asia’s third-largest economy has also slowed after Subbarao raised rates by a record 3.75 percentage points from March 2010 to October 2011 to try and contain inflation.
Singh vowed on June 6 to revitalize growth outlining projects including new ports, roads and power plants. The impending resignation of Finance Minister Pranab Mukherjee to contest India’s presidential poll may prompt a cabinet overhaul that also seeks to shore up investor sentiment.
Singh is joining world leaders at the G-20 summit today and tomorrow, which begins a week of crisis meetings taking place after Spain this month became the fourth euro-region nation to seek a bailout amid the weakest global economy since the 2009 recession.
Some companies in India have felt the impact of a moderating economy that is being squeezed by price pressures. Car sales fell in May at Maruti Suzuki India Ltd., and the Indian units of Ford Motor Co. and General Motors Co., after a rise in gasoline tariffs.
The nation’s “mix of growth and inflation is expected to remain challenging,” said Singapore-based Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. The temptation to address the situation with rate cuts is “dangerous,” she said.
Duvvuri Subbarao was born on August 11th, 1949 according to http://en.wikipedia.org/wiki/Duvvuri_Subbarao
August 11th, 1949
8 + 11 +1+9+4+9 = 42 = his life lesson = Everybody loves Duvvuri.
August 11th, 1949
8 + 11 +2+0+1+1 = 23 = his personal year (from August 11th, 2011 to August 10th, 2012) = Taking action.
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