Reuters: Regulatory News: UPDATE 3-India slashes rates; sees little room for more

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UPDATE 3-India slashes rates; sees little room for more Apr 17th 2012, 11:50 Tue Apr 17, 2012 7:50am EDT * Rate cut of 50 bps exceeds forecast for 25 bps cut * RBI says space for further rate cuts limited * Bond yields, swap rates fall; stocks rise * RBI expects GDP growth of 7.3 pct this fiscal year * RBI sees inflation at 6.5 pct in March 2013 By Tony Munroe and Suvashree Dey Choudhury MUMBAI, April 17 (Reuters) - India's first interest rate cut in three years may be its last for a while. The central bank cut rates on Tuesday by an unexpectedly sharp 50 basis points to boost the sagging economy, but warned there was limited scope for more cuts, with inflation likely to remain elevated and growth on track to pick up, albeit modestly. The Reserve Bank of India, which was tightening monetary policy long after central banks elsewhere began easing, lowered its policy repo rate to 8.00 percent, compared with expectations for a 25 basis point cut in a Reuters poll. "RBI is indicating that there is a limit for further rate cut expectations, and I think they are pretty much done with further rate cuts this year," said Rajeev Malik, economist at CLSA in Singapore. The RBI also warned that India's current account deficit, which widened to 4.3 percent of GDP in the December quarter, is "unsustainable" and will be difficult to finance given projections of lower capital flows to emerging markets in 2012. India's rupee has been under pressure as foreign investors worry about persistent inflation, a yawning current account gap and fiscal indiscipline on the part of New Delhi, prompting concern about the country's balance of payments. Investors and companies cheered the rate cut, with bond yields and swap rates falling sharply, although the rally was capped by expectations for few further cuts in the near term. Indian stocks ended 1.2 percent higher. Some RBI-watchers said Tuesday's move was risky given the potential for resurgent inflation. "The RBI was clearly itchier to cut policy rates than expected, but the 50 bp cut may have been a bit too premature and aggressive, in our view. If that turns out to be the case, it could hurt RBI's credibility while doing little to raise growth on a sustained basis," HSBC economist Leif Eskesen wrote. RBI Governor Duvvuri Subbarao said the deeper-than-forecast cut is intended to ensure that banks cut their lending rates soon. Indian banks have been reluctant to lower lending rates amid still-tight liquidity and high deposit costs. The country's largest lender, State Bank of India said later on Tuesday that it would cut rates on some loans that have high interest rates, while ICICI Bank said it would reduce deposit and lending rates. Neither were more specific. Economists have in recent weeks been scaling back their rate cut forecasts. Nomura said it expects the RBI to hold off from cutting rates at its next reviews in June and July, and forecast just one more 25 bps rate cut in 2012. Citigroup expects just one more rate cut in the current fiscal year. India's economy grew by 6.1 percent in the December quarter, its slowest in almost three years, but the central bank had been reluctant to begin cutting rates as inflation remained elevated. Subbarao maintained a cautious view in his policy statement. "It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates," Subbarao said. CAUTIOUS VIEW The RBI raised rates 13 times between March 2010 and October 2011 as it struggled to contain price pressures, with headline inflation at one point accelerating into the double digits as the cost of fuel and food soared. Headline wholesale price index eased slightly to 6.89 percent for March but was still above expectations, as a drop in manufacturing inflation was offset by a surge in food inflation, data showed on Monday. On Tuesday, the RBI left unchanged the cash reserve ratio (CRR), the share of deposits that banks must hold with the central bank, at 4.75 percent, in line with expectations, after cutting it by 125 basis points since January to ease tight market liquidity. Subbarao said liquidity conditions are moving towards normal after several months of acute shortages of cash in the banking system, but also said the RBI would take "appropriate and proactive" steps if needed to revive liquidity. The central bank said its baseline expectation for gross domestic product growth in the fiscal year that ends in March 2013 is 7.3 percent, compared with an expected 6.9 percent in the just-completed year. It expects headline inflation to end the year at 6.5 percent, with little deviation foreseen during the year. BOTTLENECKS Sluggish capital investment has exacerbated bottlenecks in the Indian economy, bringing down its capacity for non-inflationary growth to 7.5 percent, according to Subbarao, from 8.5 percent before the global financial crisis. He reiterated the need for the government to cap its subsidy burden, which led to a bloating of the fiscal deficit in the recent fiscal year to 5.9 percent of GDP. The weakened government has been unwilling to pass along higher global oil prices to end-users, but pressure on the fiscal deficit is expected to force it to do so. "It is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production," Subbarao said. Corporate India, dejected over government inaction that has thwarted capacity expansion, has long clamored for rate cuts. Siddhartha Roy, economic adviser at the Tata Group, the software-to-steel conglomerate that is India's biggest business house, said Tuesday's rate cut is welcome but more is needed. "First we need more rate cuts to the tune of around 150 basis points in order to make the real interest rates realistic. Then, the fiscal side needs to be controlled to prevent crowding out of the private sector and available liquidity is well distributed," he said. Link this Share this Digg this Email Reprints

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