India Begins Winding Down Of Stimulus Measures, But Interest Rates Remain Unchanged – For Now

Money Morning
updated | Author's Website

The Reserve Bank of India (RBI) said it expects the gross domestic product (GDP) of Asia’s third-largest economy will grow at least 6% in the current fiscal year and that it will begin winding down stimulus measures while turning its attention toward inflation.

The RBI now expects a higher rate of inflation compared to its July estimate, but still kept its key lending rate, the repurchase rate at 4.75%. The reverse repurchase or “repo” rate of 3.25% was also untouched.

“Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the baseline projection for [wholesale price index] inflation at end-March 2010 is placed at 6.5% with an upside bias,” RBI Governor Duvvuri Subbarao wrote in his review of monetary policy, which was published today. The estimate was up from 5% in the RBI’s July review.

A growing concern about inflation as well as the RBI’s removal of emergency liquidity support measures sent India’s key equity market, the Sensex (^BSESN), down 2.3% – the most in the last six weeks. Real estate shares were hardest hit, falling 6.2%.

The RBI raised the statutory liquidity ratio (SLR) to 25% from 24%, but noted that with current bank SLR holdings at 27.6%, the increase won’t have an impact on the system’s cash flow.

India is expected to join other nations in loosening its monetary policy in 2010, but held off this time around because “the recovery is as yet fragile.” The monsoon season in southwest India – a key sugar cane growing region – was so bad this year, India went from being a net exporter to net importer.

“It is imperative to continue with the accommodative stance to compensate for the decline in agricultural output and till there is firm evidence of sustained global recovery,” Governor Subbarao said.

Australia is the only G-20 economy to raise interest rates so far, but other nations are expected to follow in the coming months, including India, Canada and South Korea, while all G-20 nations to proceed with their so-called “exit strategies” by the end of April, a Reuters poll showed.

“We will start to see G-20 economies exiting now, starting with the emerging ones and then the advanced countries,” Mridul Saggar, chief economist at Kotak Securities Ltd. told Bloomberg News. “In India’s case, growth is coming back on track and inflation is becoming quite a concern.”

You may also like: