Reserve Bank of India Holds Key Interest Rate Due to Inflationary Risks

IndusView, Monday 17 June 2013 (London): The Reserve Bank of India (RBI) has today kept its key interest rate steady at 7.25%, in line with expectations, due to continued concern with inflation.

The Wholesale Price Index, India's most closely watched inflation gauge, dropped to 4.7% in May on an annual basis, down nearly two-tenths of a percentage point from its 4.89% level in April. The broadly based wholesale price inflation reading, the lowest since late 2009, was well below market forecasts of a 4.9% rise.

“Cutting the key lending rate could create further devalue the Rupee, increase the costs of imports and put inflationary pressure,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Inflation remains a roadblock for policymakers struggling to breathe life into Asia's third-largest economy, and is a major factor in the declining popularity of Prime Minister Manmohan Singh's government.”

India's economic growth rate slipped to a decade low of 5% in 2012-2013 on account of poor performance of farm, manufacturing and mining sectors. It is projected to rise to 5.7% in the 2013 fiscal year and firm to 6.5% and 6.7% in 2014 and 2015, respectively.

GDP growth in South Asia as whole slipped to 4.8% in 2012, mainly reflecting a continued deceleration in India, slower growth in Sri Lanka and Bangladesh, and sluggish growth in Pakistan and Nepal. Regional GDP growth is projected to pick up to 5.2% in 2013, before accelerating to 6% and 6.4% in 2014 and 2015, in line with strengthening external demand, normal monsoons and a gradual pickup in investment spending.

“There is a need to further improve the business environment. Reforms in the last one year are welcome, but more needs to be done in order to build foreign investors confidence,” said Rangar. “Decline in foreign investments could put pressure on the country’s balance of payments and also impact the value of the rupee.”

Media in India are expressing concerns over a sharp depreciation in the value of the rupee against the dollar. The rupee struck a lifetime-low of 57.98 to the dollar earlier in the week has sparked fears inflation could resurge as a key problem in India, which buys 80% of its crude oil from abroad. Earlier today, the rupee was at 57.72 to the dollar versus its previous close of 57.5150.

Production at factories, utilities and mines rose 2% from a year earlier after a revised 3.4% gain in March while Consumer prices climbed 9.31% in May from a year earlier. Gold and oil imports contributed to the $32.6 billion shortfall in the current account for the last quarter of 2012.

The Indian government is considering removing the FDI (Foreign Direct investment) cap on the telecom sector and raising the limit in defense in order to seek more foreign investment and boost the rupee value. Overseas investors would be able to own all of a telecoms company, up from 74% currently, with the ceiling in defense rising to 49% from 26%.

 The RBI has cut its policy repo rate by 75 basis points in 2013 to 7.25% but has warned of "little space" for further easing citing inflationary risks.

India’s GDP Growth Slows Sharply in March Quarter

IndusView, Friday May 31 (London): India’s economic growth slowed to its slowest pace in a decade in the March quarter, as the manufacturing and agriculture sectors shrank and a fall in the rupee suggests the economy remains under pressure in the current quarter.

India’s economy grew 5% in the year ended March, the slowest pace in a decade, in line with the projection of the statistics office. Growth in the fourth quarter slowed to 4.8% from 5.1% a year ago. India was recording annual growth of 9% until two years ago, but in recent months it has seen a sharp decline blamed on a slowdown in its manufacturing and agriculture sectors.

“This persistent sluggishness in the economy puts the Reserve Bank of India in a conundrum. It has to cut interest rates to stimulate growth but it can’t cut much as it’ll further devalue the rupee,” said Bundeep Singh Rangar, Chairman of London-based consulting firm IndusView. “What’s alarming is that the drop in manufacturing output suggests a decline in domestic consumption on top of a drop in foreign investment. The decline of the rupee has increased the cost of importing goods and put further inflationary pressure.”

During the year, agriculture grew at 1.9% compared with 3.6% a year ago, manufacturing at 1% against 2.7%, the trade, communication sector at 6.4% compared with 7%, while community services measuring government expenditure picked up to 6.6% from 6% a year ago.

The Indian rupee today sank to 10-month lows before closing with 21-paise loss at 56.17 against the US dollar, making imports costlier that is likely to worsen government's Current Account Deficit (CAD), currently estimated at 5%. The Reserve Bank of India cut its key lending rate thrice this year, all by a quarter of a percentage point, and markets were hoping it to further reduce the rate at its next policy meeting.

Foreign investment inflows into the country topped $50 billion on a net basis during 2012-2013 despite the government's efforts to woo foreign direct investment (FDI) yielding poor results. On a gross basis, investment was down almost 21% to $36.9 billion as foreign investors stayed away due to the poor sentiment in the country as well as problems in Europe and the slow US recovery.

Economists blame India’s relatively sluggish growth over the past year on reluctance by foreign or domestic business to invest, as a result of poor infrastructure for power and transport, uncertainties over taxation, bureaucratic delays and continued restrictions on foreign direct investment.

According to the Federation of Indian Chambers of Commerce and Industry, $52 billion of projects were facing delays because of a lack of official clearances. More than half the value of stalled projects is in power, with others in roads, metals, oil and gas and mining.