Friday, March 27, 2009

Subbarao Says RBI Will Act Appropriately on Growth

The Reserve Bank of India will adopt appropriate measures on boosting economic growth, Governor Duvvuri Subbarao said on the day the nation’s inflation rate fell to the lowest on record, giving room for more rate cuts.
“We will take whatever action is necessary,” he said at the Confederation of Indian Industry’s annual meeting in New Delhi today. The central bank is constantly monitoring the situation, Subbarao said, without elaborating.
India’s inflation slowed to 0.27 percent, the government said today, allowing space for interest-rate cuts to bolster an economy growing at the weakest pace in six years. Inflation is the slowest on record, according to data available since 1990 on the Bloomberg. Economists expected an increase of 0.12 percent.
India’s economic recovery will be “swift and sharp,” aided by savings and productivity, Subbarao said, without giving a timeline. Growth fundamentals are intact, while local banks are sound and well-capitalized, he said. A decline in crude oil prices provides space for the government to spend, he said.
The government’s borrowings have risen because of the need to pay for economic stimulus plans, he said. Next year’s borrowing program will be conducted by the central bank in a manner that causes the least disruption, he said.
The business environment in the fiscal year starting April 1 may be challenging unless a revival in business confidence takes place, Subbarao said.
Economic Growth
India’s economy may revive in the next three to six months, said Suresh Tendulkar, head of the prime minister’s economic advisory panel, Press Trust of India reported, citing comments made in Kolkata today.
Subbarao dismissed concerns that India is slipping into a period of deflation.
The finance ministry’s top economist Arvind Virmani earlier this month ruled out the possibility that India will suffer from deflation. While the wholesale-price index is the Asian nation’s benchmark measure for prices, India has four consumer-price indexes that are running at more than 7 percent.
“Talk of deflation in India is misplaced when consumer prices are still very high,” said Rajeev Malik, a regional economist at Macquarie Group Ltd. in Singapore. “Negative prints on wholesale prices and weak economic activity may prompt the central bank to ease policy rates further.”
Price Indexes
India’s inflation based on consumer prices paid by industrial workers stood at 10.4 percent in January. The consumer-price index for farm workers gained 11.62 percent in the same month, according to government data.
The Reserve Bank of India uses the wholesale price index as the benchmark because the consumer price indexes don’t capture the aggregate price picture, unlike in other countries, said Malik. India’s statistics department said last year it is working on a plan to build a comprehensive consumer price index to use as the benchmark.
“We expect the wholesale-price index readings to be negative for around two quarters,” said Sonal Varma, a Mumbai- based economist at Nomura International Ltd. “But do not confuse this with deflation. Consumer prices are still firm though we expect it to moderate with a lag to about 4 percent by the fourth quarter of this year.”
Varma expects the central bank to cut its repurchase and reverse-repurchase rates by 100 basis points to 4 percent and 2.5 percent respectively by the middle of 2009. A basis point is 0.01 percentage point.
Interest Rates
Subbarao has cut the repurchase rate by 400 basis points since October. India has more room to lower rates than other economies, with the Bank of England’s benchmark at 0.5 percent and the U.S. Fed’s target interest-rate range at 0 percent to 0.25 percent.
Deflation is a sustained decline in prices that may encourage consumers to delay spending, hurting economic growth.
Inflation in India is slowing not because of a contraction in consumer demand, Ashok Chawla, economic affairs secretary in the finance ministry, told reporters in New Delhi today.
China last month suffered its first deflation since 2002, joining Ireland, Taiwan and Thailand in posting record falling prices in their most recent figures, according to Bloomberg News data covering 78 countries.
India’s $1.2 trillion economy may grow around 6.5 percent in the year ending March 31, the nation’s Planning Commission Deputy Chairman Montek Singh Ahluwalia said this week.
Prime Minister Manmohan Singh said March 24 that growth will rebound strongly in about six months on the back of rural demand. Agriculture has expanded at an unprecedented 4.4 percent average annual pace since 2004, providing village dwellers with more money to spend.

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