India seen leaving rates on hold as inflation too high

by on July 30, 2012 9:03 pm BST

MUMBAI, July 31 |
Mon Jul 30, 2012 5:03pm EDT

(Reuters) – India’s central bank is expected
to leave interest rates unchanged on Tuesday, seeing high
inflation as a bigger danger than the slowest growth in almost a
decade and keeping pressure on the government to revive the
economy’s fortunes.

Weaker-than-normal monsoon rains add to expectations that
the Reserve Bank of India (RBI) will keep its repo rate on hold
at 8.00 percent. High food prices resulting from poor rains may
be beyond the reach of monetary policy, but they can add to
inflationary expectations and tempt the government into spending
more on subsidies.

Of 20 economists polled last week by Reuters, 19 expected
the central bank to keep the repo rate unchanged.

After its mid-quarter policy review in June, roughly
one-third of respondents had expected a July rate cut. Since
then, RBI Governor Duvvuri Subbarao has voiced concern about
high inflation, including for consumer prices, reinforcing
expectations he will leave rates on hold.

Still, several market participants said the rapid
deteriorating in the global economy as the euro zone debt crisis
takes its toll suggested that the Indian central bank’s decision
may still be a close call.

“Over the past 6-8 weeks, the global situation has turned
sharply adverse, and downside risks to the GDP growth projection
have emerged. Upside risks to inflation seem limited at this
juncture,” said Hitendra Dave, head of global markets at HSBC in

On Monday, the RBI warned about a weakening growth outlook
and upside risks to inflation in its quarterly review of the

In June, wholesale price inflation rose to 7.25 percent,
while consumer price inflation hit 10.02 percent. Wholesale
prices are the main inflation gauge in India.

The central bank is also expected to leave the cash reserve
ratio, the share of deposits that banks must keep
with the RBI, unchanged at 4.75 percent on Tuesday.

Indian stocks rallied on Monday, partly on hopes for a
surprise rate cut, but debt markets remained cautious as
benchmark 10-year bond yields rose slightly.

Subbarao has stressed the need for the government to reduce
its fiscal deficit and improve the investment climate. He has
said the central bank’s 13 rate rises between March 2010 and
October 2011, as it fought double digit inflation, were not the
key reason for the slowdown in the economy, which grew at just
5.3 percent in the March quarter, its weakest pace in 9 years.

The Indian central bank cut rates by a steeper-than-expected
50 basis points in April but has maintained a hawkish stance
since, even in the face of widespread expectations in June it
would cut rates again.

A continued hard line would make it an outlier compared with
China, Brazil, South Korea and others, which have eased monetary
policy in recent weeks to bolster their flagging economies.

The central bank has also been adamant that the government
does its bit to boost the once high-flying economy.

It called on the government of Prime Minister Manmohan Singh
to rein in spending on subsidies, but expectations that New
Delhi may soon raise diesel prices to reduce its spending and
borrowing burden and so alleviate pressure on market rates have
been pushed back due to opposition from within the ruling

Singh spoke a month ago of reviving the economy’s “animal
spirit,” but companies are still waiting for government
measures, such as allowing foreign direct investment in
supermarkets and airlines, to lift sentiment.

A study last week by Indian rating agency Crisil found that
capital expenditure by 170 private-sector companies will fall by
35 percent on average in the fiscal year that ends in March.