India Lowers Growth Forecast, Signals More Rate Cuts
India’s central bank lowered its growth forecast and signaled further cuts in interest rates from record lows to encourage lending and spur economic expansion.
Asia’s third-largest economy may expand 7 percent in the year to March 31, compared with a previous estimate of between 7.5 percent and 8 percent, the Reserve Bank of India said today. The growth forecast has a “downward bias,” said the bank, which maintained its reverse repurchase rate at 4 percent and the repurchase rate at 5.5 percent.
Governor Duvvuri Subbarao said commercial banks, which haven’t followed his four rate reductions since October, should cut lending rates to help spur growth. The global recession has “amplified” risks to an economy the central bank says may expand this year at the slowest pace since 2003.
“The case for a further rate cut is strong,” said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc. “There is little room for substantial fiscal expansion and that leaves a greater burden on the central bank.”
Bonds fell after the announcement, with the yield on the benchmark 10-year government bonds rising to 5.85 percent as of 11:25 a.m. in Mumbai from 5.82 percent before the decision. Stocks maintained their gains, with the Bombay Stock Exchange’s Sensitive Index up 2.4 percent.
‘Considerable Room’
“To arrest the moderation in growth, it’s critical that banks expand the flow of credit to productive sectors of the economy and do so at viable rates,” the central bank said today. “The policy easing done by it in the last few months allows for considerable room for banks to respond more actively to the policy cues.”
Lending rates for the best corporate customers at ICICI Bank Ltd., the nation’s second biggest, stand at 16.75 percent, reflecting only one 0.5 percentage point cut. The central bank’s repurchase rate, at which it lends to commercial banks, has dropped by 3.5 percentage points since October.
Commercial lenders have been slow to follow the central bank’s lead in cutting rates because they are still paying high interest on deposits following the RBI’s efforts to control inflation by raising interest rates to a seven-year high in July.
Monetary policy is the main tool available to authorities in India to support growth as public debt the equivalent of four-fifths of gross domestic product limits the government’s ability to step up spending.
Stimulus Package
Governor Subbarao unexpectedly cut rates on Jan. 2 to coincide with Prime Minister Manmohan Singh’s second fiscal stimulus package since December.
Since January, data has confirmed Subbarao’s comments that the economy is slowing along with investment instant payday loan.
Exports, 14 percent of gross domestic product, sank 9.9 percent in November from a year earlier. Industrial production grew at half the pace between April and November than for the same period a year earlier.
“India cannot be expected to remain immune to a global crisis of this nature,” the central bank said in its report today. “India has rapidly integrated into the global system and has linkages through two-way movements of capital and finance.”
Foreign investors, who were instrumental in driving the Indian economy’s record 9.3 percent expansion in the three years to March 2008, are fleeing. Last year they pulled out $13.1 billion from Indian stocks after buying $17.2 billion of equities in 2007. India’s Sensitive Index, or Sensex, has dropped 10 percent so far this year, extending last year’s 52 percent slide.
Slowing Inflation
The argument that India’s inflation rate requires policy caution is also losing credence. Wholesale prices for the week ended Jan. 3 rose 5.6 percent, less than half the pace in August.
Subbarao today cut the central bank’s inflation forecast to below 3 percent by March 31, from 7 percent estimated in October.
Singh, who underwent heart bypass surgery on Jan. 24, has been coordinating with Subbarao since October to ensure investment doesn’t suffer from the global credit crunch. Investment typically accounts for about one third of growth in the $1.2 trillion economy.
The government has undertaken a $4 billion plan to invest in roads and ports, and on Jan. 2 increased the overseas investment limit in the local corporate bond market to $15 billion from $6 billion.
Singh is also under pressure to prop up the economy and prevent companies from scaling back production and firing workers before general elections scheduled for April and May.
Tata Motors Ltd., India’s biggest truckmaker, stopped production at a commercial-vehicle factory for six days this month. Hyundai Motor Co.’s Indian unit is cutting output and firing temporary staff. Indian exporters said this month they expect to cut about 10 million jobs by March.
“Ensuring job security is the main challenge before the government ahead of the elections,” said Rajeev Malik, a Singapore-based economist at Macquarie Group Ltd. “The mother of all monetary easing is still alive and kicking. It’s just that they took a pause today.”