Business | Economy
Channel Sponsor
India to cut rates to aid economy
India is likely to cut rates to boost confidence after last week's attacks in the financial capital Mumbai, with inflation falling to a seven-month low yesterday and providing headroom to ease policy.
- Reuters
- Published: 23:35 December 4, 2008
New Delhi: India is likely to cut rates to boost confidence after last week's attacks in the financial capital Mumbai, with inflation falling to a seven-month low yesterday and providing headroom to ease policy.
The head of the Reserve Bank of India (RBI) warned the outlook for India was mixed and a period of painful adjustment was inevitable, but said the bank would act when the time was right as the impact on India from the global crisis had been more severe than expected.
A senior government official told Reuters the central bank would reduce two key interest rates to provide stimulus to the financial sector and that the government was preparing measures to boost infrastructure and the auto sector.
"Clearly, focus is now on growth and we can expect rate cuts from the RBI and fiscal support from the government," said Anubhuti Sahay, economist at Standard Chartered bank in Mumbai.
India long hoped it would avoid the worst of the slowdown which has dragged big economies into recession, but even before last week's rampage by terrorists through Mumbai, there were signs of waning growth.
It has cut its key lending rate, the repo rate, by 150 basis points to 7.5 per cent since the global credit crisis reached its shores in October and released billions of dollars' worth of funds into the banking system to try to keep credit flowing.
Other Asian authorities have also taken action, with China cutting rates last week, Australia and Thailand following this week and, in Europe, Sweden's central bank slashing its rates by a record 175 basis points yesterday.
India's markets were buoyed by expectations that rates would fall, after investor confidence took a hit from last week's attacks on a Jewish centre, railway station and two luxury hotels in the heart of the business district, in which 171 people were killed.
The 30-share index, which has fallen by about half this year, ended up 5.5 per centhigher yesterday. The rupee, whose fortunes are heavily tied to foreign capital flows, pulled back from near a record low to trade at Rs49.59/61 per dollar.
But bond yields rose as traders grew nervous that fiscal stimulus meant more government borrowing.
India's wholesale price index, the most widely watched inflation measure, rose 8.4 per cent in the 12 months to November 22, below forecasts for a rise of 8.9 per cent.
Analysts said with inflation slowing from a peak of 12.91 per cent in August, it could fall to between 4 and 6 per cent by March as commodity prices ebb and producers lose pricing power amid decelerating growth.
"I think we are looking at very significant repo and reverse repo rate cuts of 50 basis points each," said Abheek Barua, chief economist at HDFC Bank in New Delhi.
The reverse repo rate, at which the central bank absorbs cash from the market, has held at six per cent since July 2006.
The government official, who declined to be identified, said the central bank would announce soon a range of measures such as reductions in the repo and reverse repo rates.
But RBI governor Duvvuri Subbaro told a television channel rate that adjustment was not the only avenue for stimulating demand.
"We are monitoring the situation closely and continuously and we will take appropriate action at the appropriate time," he said.
"Once calm and confidence are restored in the global markets, economic activity in India will recover sharply. But a period of painful adjustment is inevitable."
The central bank forecasts growth of 7.5 to 8.0 per cent for the fiscal year which ends on March 31.
But private sector economists say it is more likely to be closer to 7 per cent and the risk is growing it will slip under 6 per cent in the fiscal year of 2009 to 2010, below the required pace of expansion needed to keep pace with India's growing labour force.
Share this article
More from Economy
More from Business
Popular in Business
-
Budget travel
Airlines in the region
Take a pictorial look at some of the budget airlines in GCC
Business Editor's choice
-
Experts seek solutions to global gloom
Suggestions formulated in Dubai will feature in next year's WEF
-
Qatar benefits from diversification
Doha's readiness to look beyond hydrocarbons as a growth engine bodes well
-
When the Web lives worldwide
Cutting-edge firms are building massive data facilities all over the globe
