India expected to hold rates despite pressure

PUBLISHED : Tuesday, 18 December, 2012, 11:23am
UPDATED : Tuesday, 18 December, 2012, 11:23am

India’s central bank is expected to keep interest rates on hold Tuesday, despite mounting pressure from bankers and industry for a cut to revive the flagging economy.

The Reserve Bank of India has kept rates steady since April -- when it cut them for the first time in three years -- saying inflation must fall and the ballooning fiscal deficit needs to be curbed before it eases borrowing costs.

Some analysts say the RBI could, however, lower by a quarter point the cash reserve ratio -- the percentage of deposits banks must keep with the central bank -- in a move aimed at boosting liquidity and spurring lending.

India’s once-booming economy has slowed sharply due to high interest rates, global economic woes and sluggish investment caused by domestic and overseas concerns about Indian policy-making and corruption.

The finance ministry on Monday cut its growth forecast for this fiscal year to 5.7-5.9 per cent, down from 7.85 per cent estimated at the start of the year, putting India on track for its worst annual performance in a decade.

“The lending rate cuts will start in the first quarter of 2013,” said Siddhartha Sanyal, chief India economist at Barclays Capital, adding the central bank could reduce the cash reserve ratio by 25 basis points on Tuesday.

The RBI is likely to wait until January before cutting rates, which could fall by as much as 100 basis points by mid-2013, Sanyal said.

The key repo rate, at which the RBI lends to commercial banks, is currently 8.0 per cent.

Rupa Rege Nitsure, chief economist at Bank of Baroda, expects interest rates to stay unchanged but forecast a cut in the cash reserve ratio as ”liquidity concerns are rising”.

“Though inflation is easing, retail price pressures remain,” she said, adding “expectations of a rate cut in January have increased”.

But some investment houses say the bank could cut rates on Tuesday. Goldman Sachs noted both inflation and growth “have surprised on the downside”.
Inflation slowed to a 10-month low of 7.24 per cent in November.

Now, there “is a reason for the central bank to move earlier than its previous guidance,” Goldman Sachs economist Tushar Poddar told investors in a note.

China, South Korea and Brazil have all cut rates to shield their economies from the effects of the eurozone debt crunch.

Central bank governor Duvvuri Subbarao, said at the time of the last policy meeting in October, there was “scope for monetary policy easing” in the January-to-March quarter.

The central bank will delay the benchmark rate cut until January “but they could cut the cash reserve ratio, which is a growth-supportive signal”, Abheek Barua, chief economist at private HDFC Bank, said.