India Trims Interest Rate as It Battles a Slowdown

MUMBAI — The Indian central bank cut its benchmark interest rate Friday for the third time since January as growth slowed and inflation ebbed, but it disappointed markets by saying that there was little room to ease monetary policy further.

The central bank, the Reserve Bank of India, trimmed its key policy repurchase rate — the rate at which banks can borrow from the central bank — by a quarter of a percentage point to 7.25 percent, the lowest level since May 2011. The central bank kept the cash reserve ratio for banks unchanged at 4 percent. Both moves were in line with economists’ expectations.

The central bank warned, however, that the risk of inflationary pressure persisted despite a recent sharp decline in wholesale price index inflation and that a high current account deficit posed the biggest risk “by far” to the Indian economy.

“The balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing,” the bank wrote in its policy statement.

Some in the market had been hoping for more aggressive policy easing actions and a less hawkish tone from the central bank’s governor, Duvvuri Subbarao, as India grappled with economic growth that slowed to about 5 percent in the financial year that ended in March, its weakest performance in a decade.

Indian stocks and the rupee fell after the policy statement, and bond yields rose.

“In essence, the guidance from the central bank is that the correction in the inflation and current account position is more cyclical, rather than structural,” said Radhika Rao, an economist at DBS in Singapore.

“Some sacrifice by way of slower growth seems inevitable then,” Ms. Rao said.

In March, India’s benchmark inflation — the wholesale index — fell to its lowest level in more than three years at 5.96 percent, but the consumer price index remained elevated at 10.39 percent.

The current account deficit swelled to a record 6.7 percent of gross domestic product in the October-to-December quarter. While that is expected to ease on lower global commodity prices and a rise in Indian exports, the deficit is on track to remain well above the 2.5 percent level that is seen as sustainable.

“Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows jeopardizing our macrofinancial stability,” the central bank said.

The Reserve Bank of India said it expected the economy to grow at a pace of 5.7 percent in the year that began in April, and projected wholesale price inflation at about 5.5 percent during the year. It said its intention was to lower wholesale inflation to 5 percent by March 2014 “using all instruments at its command.”

Article source: http://www.nytimes.com/2013/05/04/business/global/04iht-rupee04.html?partner=rss&emc=rss