India's central bank left its key interest rate unchanged Tuesday, resisting growing pressure from New Delhi to kick start growth even as it slashed its growth forecast and raised its inflation projection for Asia's third-largest economy.
Though the Reserve Bank of India left the policy rate at 8.0 percent, it did trim the cash reserve ratio by a quarter of a point, to 4.25 percent, effective November 3. It said this will inject 175 billion rupees into a cash-constrained banking system, which should improve the flow of credit and help rekindle growth.
RBI again slashed its growth outlook for the year ending March, from 6.5 percent to 5.8 percent. Its initial projection was 7.3 percent. The bank said headline inflation will likely hit 7.5 percent in March, up from an earlier forecast of 7.0 percent — and far above the bank's medium term target of 3.0 percent.
RBI has been under growing pressure from New Delhi and business leaders to cut interest rates as growth slipped to its lowest levels since 2009, but the bank says inflation remains its "primary focus."
"Managing inflation and inflation expectations must remain the primary focus of monetary policy," the bank said in its quarterly policy statement Tuesday. The bank said that containing inflation will contribute to consumer and investor confidence, both key to sustaining growth in the medium term.
It said there is a "reasonable likelihood of further policy easing" in the January to March quarter, provided inflation eases and New Delhi's ambitious reform agenda gets translated into action.
After peaking at 9.2 percent in the March 2011 quarter, India's economic growth slid to 5.3 percent a year later, its lowest level since the Great Recession in 2009. Though growth then ticked marginally higher, to 5.5 percent, RBI said the economy is still mired by stalled investment, weakening consumption and falling exports.
India's finance minister, Palaniappan Chidambaram, on Monday announced an ambitious fiscal consolidation plan, which was widely seen as prompt by New Delhi for a rate cut.
Chidambaram said India's fiscal deficit would be 5.3 percent for the year ending March, up from a budgeted 5.1 percent, before falling 0.6 percentage points a year to hit 3.0 percent by fiscal 2017. He said the current account deficit would narrow to 3.7 percent of GDP, or $70.3 billion in the year ending March, from 4.2 percent of GDP ($78 billion) the prior year. The government, he added, is confident that the current account deficit will be fully financed through capital inflows. He said all flagship programs to protect the poor by guaranteeing them, for example, jobs and food — which critics say are too costly — will remain untouched.
The speech was part of New Delhi's campaign blitz to restore investor confidence, which has been battered by corruption scandals, policy flip flops, bureaucratic paralysis and slowing growth. The government has also recently taken the politically difficult steps of hiking administered diesel prices and loosening foreign investment restrictions in retail and airlines.
Chidambaram's fiscal plan, however, came in for criticism as vague and unrealistic, and RBI's Tuesday statement cast into further doubt some of the finance ministry's assumptions.
Nomura economist Sonal Varma said Chidambaram's announcement was "a statement of intent" and cautioned that "as with other reform measures announced so far, implementation remains key."
RBI said Tuesday that from April through August, the fiscal deficit was nearly two-thirds of the entire year's budget, cautioning that the fiscal deficit is "expected to be higher than budgeted." The bank also noted the risk of volatile capital flows, and said that given current global economic uncertainty financing a large current account deficit "poses challenges."
The bank reiterated its concern with the current account and fiscal deficits, saying they "continue to pose significant risks to both growth and macroeconomic stability."
The bank praised the government's slew of recent policy announcements for having "positively impacted sentiment," but cautioned that they "need to be translated into effective action to convert sentiment into concrete investment decisions."
Associated Press
Tue Oct 30 2012
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