India Cuts Key Rates as Growth Risks Trump Inflation
Comment of the Day

April 17 2012

Commentary by David Fuller

India Cuts Key Rates as Growth Risks Trump Inflation

This was an important and overdue step in my opinion. Here is Bloomberg's summary:
April 17 (Bloomberg) -- India slashed its benchmark interest rate by a greater-than-forecast half a percentage point, seeking to bolster growth with the first reduction since 2009. Inflation might limit the room for further cuts, the central bank said.

Governor Duvvuri Subbarao lowered the repurchase rate to 8 percent from 8.5 percent, the Reserve Bank of India said in a statement in Mumbai today. The outcome was predicted by three of 25 economists in a Bloomberg News survey. Seventeen expected a 0.25 percentage-point cut and the rest predicted no change.

The move stoked gains in the rupee and government bonds, and may buttress demand in an economy hampered by political gridlock that's restraining investment. Policy makers are seeking at the same time to contain inflation that remains the fastest among the BRIC nations.

"They are playing with fire," said Jahangir Aziz, an economist at JPMorgan Chase & Co. in Washington who used to work at the International Monetary Fund. "I am increasingly assured that this is going to be last rate cut" given the risks to inflation from oil prices and loose fiscal policy, he said.

The yield on the most-traded 8.79 percent notes due November 2021 fell to 8.34 percent as of 4:28 p.m. in Mumbai, from the day's high of 8.51 percent and yesterday's close of 8.46 percent, according to the Reserve Bank of India's trading system. The rupee strengthened 0.2 percent to 51.56 per dollar, according to data compiled by Bloomberg. It slumped 16 percent last year, spurring price pressures by boosting import costs. The BSE India Sensitive Index of stocks closed up 1.2 percent.

David Fuller's view For all its theoretical potential, India can ill afford to see growth slip further as it certainly would without lower interest rates. Monetary policy is a blunt tool for dealing with India's inflation which comes mainly from food and oil prices.

Reform of the agricultural sector, as we have seen in all successful economies, including adequate storage and transport facilities, would go a long way towards alleviating food price inflation. Energy is a more difficult problem but I would be very surprised if India did not have undiscovered reserves of oil and gas, both onshore and offshore. India's government will hopefully recall that in competing for FDI, it is one of many candidates in a global beauty contest.

India's Bombay Banks Index (weekly & daily) has steadied above its MA and needs to hold above that support, otherwise recovery will be further delayed. India's Sensex Index (weekly & daily) needs to hold above 17,000.

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