India Prepared for Rate Cut as Central Bank Sees Inflation Easing: Economy

Reserve Bank of India Deputy Governor Subir Gokarn said the monetary authority will cut interest rates once it’s confident inflation will keep slowing.

Emerging-markets have stepped up efforts to shield growth from the impact of Europe’s debt crisis, with Brazil, Russia and the Philippines cutting rates in recent months. The Indian government can help reduce borrowing costs by narrowing itsbudget deficit

as the pace of price increases slows to 7 percent by March from 9.68 percent a year earlier, according to Gokarn.

Once the central bank has confidence that the “direction will continue, that’s really going to be the trigger,” Gokarn said in the interview on 2 February. “The visibility of the decline, I think, is the most important indication.”

Higher government spending on subsidies in the run-up to federal elections in two years threatens to stoke prices and limit the scope for monetary policy easing to support growth inAsia’s third-largest economy. The nation’s budget deficit reached 92.3 percent of the fiscal-year target in the nine months through December, a report showed this week.

Sri Lanka Raises

The Central Bank of Sri Lanka unexpectedly boosted interest rates on 2 February for the first time since 2007 to curb credit growth and ensure inflation stays low. It raised the reverse repurchase rate to 9 percent from 8.5 percent and the repurchase rate to 7.5 percent from 7 percent.

In Indonesia, growth probably exceeded 6 percent for a fifth quarter, a survey showed ahead of a government report due Feb. 6. Gross domestic product increased 6.45 percent in the fourth quarter from a year earlier, compared with a 6.5 percent pace in the previous three months, according to the median of 17 estimates.

In Europe, a rescue plan for Greece may be completed in coming days, European officials and creditors say. The plan may include a loss of more than 70 percent for bondholders in a voluntary exchange and loans likely to exceed the 130 billion euros ($171 billion) now on the table.

Fastest in BRIC

In the U.S., Federal Reserve Chairman Ben S. Bernanke said the central bank will seek to keep prices rising at a 2 percent rate and rejected suggestions that it would sacrifice its inflation goal to boost employment.

India’s benchmark inflation rate of 7.47 percent is the fastest among the so-called BRIC nations, even as it slowed to a two-year low in December. Consumer prices rose 6.5 percent in Brazil, 6.1 percent in Russia and 4.1 percent in China the same month.

Cash Injection

To control inflation, the Reserve Bank raised borrowing costs by a record 375 basis points in 13 moves from mid-March 2010 before pausing for a second straight meeting in January. Last month, it cut India’s growth forecast to 7 percent in the year through March from the 7.6 percent predicted in October. It kept the inflation estimate at 7 percent.

The central bank lowered the cash reserve ratio to 5.5 percent from 6 percent, reducing the amount of deposits lenders need to set aside as reserves for the first time since 2009 in a move it estimated would add about 320 billion rupees ($6.5 billion) into the banking system.

In an indication of cash shortages, banks borrowed 1.3 trillion rupees on average a day from the monetary authority in January, compared with 1.16 trillion rupees in December. Overnight rates surged to 9.45 last week, near a three-year high.

To ease the cash squeeze in the banking system, the Reserve Bank resumed open-market purchases of government notes after 10 months in November and has so far purchased 719 billion rupees of the securities in auctions, official data show.

Indian bonds fell the most in 26 months on Jan. 24 on speculation the central bank will halt buying government bonds after reducing reserve requirements for banks.