No rate cut despite growth concerns: analysts
Reserve Bank of India will keep interest rates at close to four-year highs when it meets on Tuesday despite mounting anxiety over cooling growth in Asia's third-largest economy, analysts say.business Updated: Jan 22, 2012 10:26 IST
Reserve Bank of India will keep interest rates at close to four-year highs when it meets on Tuesday despite mounting anxiety over cooling growth in Asia's third-largest economy, analysts say.
While other developing nations from Brazil to Indonesia have cut rates to shield their economies from the global downturn, India's worries over inflation are likely to leave the cost of borrowing unchanged.
The Reserve Bank of India has "emphasised that upside risks to inflation remain" and it would be "premature" to begin cutting interest rates at the policy-setting meeting, said HSBC economist Lief Eskesen.
The bank has hiked rates 13 times since March 2010 -- the most aggressive pace of monetary tightening among its global peers -- before going into pause mode late last year amid concerns over faltering growth.
Inflation has dropped from near-double digits to 7.47%, but economists say the downward trend is not entrenched enough to prompt a rate rollback.
The bank is, however, expected to strike a more dovish tone with "growth concerns now predominating", says Moody's Analytics economist Glenn Levine, who echoed other analysts in predicting a possible rate cut in March.
Finance Minister Pranab Mukherjee in the past week insisted that India's "economic fundamentals are strong" but warned the economy faced a "difficult" period.
The government is now projecting growth of around 7.0% for the financial year to March 2012, down from the 9.0% forecast in the budget. The economy grew by 8.5% last year.
Some economists believe the final growth figure will be slightly lower -- in the mid to upper six-percent range.
India's economy has staggered under the brunt of the 13 rate rises that have pushed the central bank's benchmark interest rate to 8.5% -- its highest level since July 2008.
The increase in borrowing costs has dampened demand at a time when growth is already being impacted by the struggling US economy and Europe's debt crisis.
Although India's projected growth remains enviable by Western standards, it is too slow to fulfil government pledges of significant poverty reduction and to create enough jobs for a soaring young workforce in the country of 1.2 billion.
The slowdown is also playing havoc with Mukherjee's fiscal deficit reduction targets.
Economists say public finances are deteriorating with a rising subsidy bill, lower-than-expected tax revenues and privatisation earnings, as well as mounting public borrowing.
The government has raised just three% of its 400-billion-rupee ($7.9 billion) target from the sale of holdings in state-owned firms this financial year -- partly due to a bearish stock market.
The government's top financial adviser C. Rangarajan says it will now be a "Herculean task" to cut the budget deficit to the targeted 4.6% of Gross Domestic Product.
The deficit, which stood at 6.7% of GDP in the first half of 2011-12, has emerged as a key concern of economists who say it could be as high as seven% for the full year -- spelling higher borrowing and bigger interest payments. The deficit was 4.7% a year ago.
Adding to the gloom is perceived paralysis in the Congress-led government, which has postponed major economic reforms as it fights numerous corruption scandals that have damaged the reputation of Prime Minister Manmohan Singh.