MUMBAI, July 30, 2013 – India’s central bank kept its benchmark interest rates unchanged on Tuesday, ignoring demands for a cut as it seeks to defend the ailing rupee from a further devaluation.
After meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said the repo rate, at which it lends to commercial banks, would stay at 7.25 percent as expected by most economists.
Governor Duvvuri Subbarao admitted that the RBI was unable to stimulate growth — which it would normally do by cutting rates in a downturn — because it was having to support the plunging currency.
“India is currently caught in a classic ‘impossible trinity’ trilemma whereby we are having to forfeit some monetary policy discretion to address external sector concerns,” Subbarao said.
The RBI has been pushed into crisis mode to protect the rupee, which has depreciated nearly 12 percent against the dollar this year and hit a record low of 61.21 this month.
The Indian unit sat at 59.83 against the dollar after the rate decision, from a previous close of 59.11, while Indian shares fell 0.58 percent to 19,479.65 points.
A rate cut would have hurt the currency more, pushing up the cost of imports and risking a further widening of the current account deficit, which hit a record 4.8 percent of gross domestic product in the fiscal year to March.
But business leaders and Finance Minister P. Chidambaram are clamouring for lower rates to boost economic growth, which slumped to a decade-low of 5.0 percent in the financial year to March.
The RBI lowered its forecast for economic growth for the current financial year to 5.5 percent from 5.7 percent.
“While the onset of the monsoon and its spread have been robust, the persisting weakness in industrial activity has heightened the risks to growth,” it said in a statement.
“Moreover, global growth has been tepid.”
Last week, the central bank raised two short-term lending rates to ease pressure on the rupee, which is the worst performing currency among major Asian nations.
Subbarao said these measures “will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation”.
The RBI had kept rates unchanged when it met last in June — after three successive rate cuts in 2013 — citing concerns about stubbornly high consumer price inflation and the soft rupee.
The bank kept the cash reserve ratio — the percentage of deposits banks must keep with the central bank — at 4.0 percent on Tuesday.
India’s economic woes have led to increased speculation that it could be headed for a serious economic crisis of the sort it suffered in 1991, which required a bailout from the International Monetary Fund.
In comments published in The Indian Express on Tuesday, top economist Arvind Panagariya warned of India’s dependence on foreign capital and said its foreign exchange reserves were too low.
Panagariya, a world expert on the economy and former chief economist of the Asian Development Bank, said he had been upbeat that India would weather its difficulties “but today I am a little worried”.
“I feel shaky. Now there is 10-20 percent chance that we might see 1991 again,” he said.
Bank governor Subbarao also called for “structural measures” to bring the current account deficit, which is the broadest measure of trade, down to “sustainable levels”.
The Congress party-led government of Prime Minister Manmohan Singh, has been criticised for its slow pace of reform and has struggled to improve the investment climate to boost the economy ahead a general election due by May.
While ministers have relaxed foreign investment rules in recent months, the axing of two mega steel projects by giant foreign firms earlier this month underlined the difficulties of doing business in India, which is riddled with corruption and red tape.
Siddhartha Sanyal, chief India economist with Barclays Capital, said the RBI decision to hold rates was expected, but that he foresaw a further 75-basis-point cut by the end of the fiscal year next March.
“The fact that the governor is talking about concerns for growth is an encouraging sign,” Sanyal told AFP.
0 comments:
Post a Comment