India May Keep Rates Unchanged as Effect of Fed#39;s Cut Assessed
India May Keep Rates Unchanged as Effect of Fed;s Cut Assessed
By Cherian Thomas
Jan. 28 (Bloomberg) — India may leave borrowing costs
unchanged as it assesses whether last week;s emergency U.S.
interest rate cut will spark a flood of capital inflows,
spurring inflation.
Reserve Bank of India Governor Yaga Venugopal Reddy will
hold the repurchase rate at 7.75 percent, according to a
Bloomberg News survey. The central bank;s other two policy rates
are also predicted to be kept unchanged. The decision is due at
noon in Mumbai tomorrow.
Since the U.S. Federal Reserve cut its benchmark rate last
week to 3.5 percent from 4.25 percent, some analysts have
started to predict India;s central bank will follow suit. Six of
18 economists now expect the repurchase rate to be lowered,
compared with none surveyed before the Fed decision.
“If not tomorrow, then soon after the environment will
force the central bank to cut rates,;; said Krish Ramkumar, who
manages the equivalent of $1 billion in debt at Sundaram BNP
Paribas Asset Management Co. in Mumbai. “Not cutting rates will
provide arbitrage opportunities and attract capital flows.;;
The spread between two-year Indian government bonds and
similar maturity U.S. Treasury notes has widened to 5.13 percent
from as low as 1.84 percent in June, Bloomberg data show.
Interest Rate Gap
The yield on India;s benchmark nine-year government bonds
has dropped 37 basis points to 7.42 percent this month on
expectations Reddy too will cut interest rates.
“The interest differential between the U.S. rate and
Indian rate has widened and we, therefore, expect larger capital
inflows,;; Finance Minister Palaniappan Chidambaram said last
week in Davos, Switzerland. “That;s something the central bank
will take on board, I suppose, before it decides its policy.;;
In 2007, record stock purchases by overseas investors
caused the rupee to gain 12.3 percent, the most in at least 34
years. The dollar inflows threatened to boost money supply and
fuel inflation, forcing Reddy to drain excess funds by
increasing the Reserve Bank;s cash reserve ratio.
Reddy has increased the reserve ratio, or the proportion of
deposits commercial banks need to place with the central bank,
five times since December 2006. The benchmark interest rate has
also been lifted nine times since October 2004.
India;s economy has averaged growth of 8.6 percent a year
since 2003, the second-fastest pace after China among the
world;s largest economies.
Higher Reserves
China, whose record trade surpluses threaten to stoke
consumer-price gains and inflate asset bubbles, this month
ordered banks to set aside larger reserves for the 11th time in
13 months.
Central banks in Asian economies such as Taiwan, Japan and
the Philippines, which depend on exports to the U.S. to sustain
their economic growth, are under pressure to reduce interest
rates or hold off further increases, economists say.
“I would expect Reddy to hold his cards as they are,;;
said John Stuermer, head of Asian emerging markets at Bear
Stearns %26amp; Co. in Singapore. “It isn;t clear whether inflation
is under control.;;
India;s benchmark wholesale price inflation hasn;t absorbed
record oil prices, which gained 57 percent in 2007 and touched
$100 a barrel this year, as state-run refineries subsidized
petrol, diesel and cooking gas. Inflation is currently 3.83
percent, less than the Reserve Bank;s 5 percent target and
almost half the level of a year ago.
In the last monetary policy statement in October, Reddy
described inflation as “suppressed;; as the economy hasn;t
taken into account the surge in oil prices. India;s government
may decide to raise prices of auto fuels by the end of January,
Oil Minister Murli Deora said Jan. 3.
Lending Rates
Still, the combination of higher policy rates and the cash
reserve ratio has forced commercial banks to increase their
lending rates to the highest in almost a decade. State Bank of
India, the country;s biggest lender, charges 12.75 percent
interest on loans to its best customers, the most since 1999.
“Higher interest rates have adversely affected the
automobile industry,;; said R. Seshasayee, managing director at
Ashok Leyland Ltd., India;s second-biggest maker of trucks and
buses. “A reduction in rates would perk up the industry.;;
India;s industrial production rose 7.3 percent in November
from a year earlier after gaining 11.8 percent in October, the
government said this month, as higher interest rates sapped
demand for cars, houses and other goods.
ACC Ltd., India;s biggest cement maker by capacity, said
sales declined 6 percent last month. Growth in passenger car
sales halved to 8.8 percent in December.
Growth in India, Asia;s third-largest economy, may ease to
8.4 percent in 2008 from 9 percent last year and 9.4 percent in
2006, the World Bank said in a report Jan. 9.
India Rate Forecasts
—————————————————————
Cash
Reverse Reserve
Company Repo Rate Repo Ratio
—————————————————————
Median 7.75% 6.00% 7.50%
% estimates at Median 66.67% 88.89% 77.78%
Average 7.67% 5.97% 7.57%
High 7.75% 6.00% 8.00%
Low 7.50% 5.75% 7.50%
Number of Estimates 18 18 18
—————————————————————
ABN Amro Bank 7.50% 6.00% 7.50%
Anand Rathi Securities 7.50% 5.75% 7.50%
Credit Analysis %26amp; Research Ltd. 7.75% 6.00% 7.75%
CRISIL Ltd. 7.75% 6.00% 7.75%
DBS Group 7.75% 6.00% 7.75%
Edelweiss Securities 7.75% 6.00% 7.50%
Forecast Singapore 7.75% 6.00% 8.00%
HSBC 7.50% 6.00% 7.50%
ICICI Securities 7.50% 6.00% 7.50%
IDBI Gilts Ltd. 7.75% 6.00% 7.50%
ING Investment Mgmt. 7.75% 6.00% 7.50%
Inst. of Economic Growth 7.75% 5.75% 7.50%
JPMorgan Chase Bank 7.75% 6.00% 7.50%
Kotak Mahindra Bank 7.50% 6.00% 7.50%
Lehman Brothers 7.75% 6.00% 7.50%
Standard Chartered Bank 7.75% 6.00% 7.50%
Sundaram BNP Paribas Asset Mang. 7.50% 6.00% 7.50%
Yes Bank 7.75% 6.00% 7.50%
—————————————————————
Note: * Standard Chartered expects 100 bps
hike in CRR by April 2008.
To contact the reporter on this story:
Cherian Thomas in New Delhi at
