Indian Central Bank Cuts Rates

MUMBAI — The Indian central bank lowered its benchmark policy rates by 0.25 percentage point Tuesday for the second time this year in an effort to help revive economic growth.

The rate cut was overshadowed by a political crisis when a major ally in the governing coalition quit, raising fresh doubts about Prime Minister Manmohan Singh’s ability to push through changes and regain investors’ confidence.

In its midquarter policy review, the Reserve Bank of India lowered its benchmark rate to 7.5 percent, as expected, and reduced another important number, the reverse repo rate — the rate at which it borrows from banks — to 6.5 percent.

It also left the cash reserve ratio for banks unchanged at 4 percent, in line with expectations.

The Indian economy is on track to grow at its slowest pace in a decade, about 5 percent in the fiscal year ending this month, and had been expected to experience modest improvement in the coming year. A recent uptick in wholesale inflation, rising consumer inflation driven by food prices and a record current account deficit limit the central bank’s ability to stimulate the economy, despite pressure from a government that is facing elections in 2014.

“Even as the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited,” the bank said in its statement.

That caution reinforced market expectations that the Reserve Bank of India, which left rates on hold for nine months before cutting them in January, will only lower them a further 0.25 or 0.5 percentage point in the fiscal year that begins in April.

After an initially muted reaction to the widely expected rate cut, Indian stocks and the rupee fell on news that a political party leader, Dravida Munnetra Kazhagam, would leave the governing coalition because of differences over the government’s stand on war crimes accusations in Sri Lanka. Bond yields rose slightly.

The withdrawal leaves Mr. Singh’s coalition at the mercy of smaller parties that are skeptical of changes like land-acquisition legislation aimed at increasing investment in infrastructure.

“As the coalition becomes more fractured and depends on outside support from parties that have a narrow agenda, the very act of policy making gets diluted,” said Abheek Barua, chief economist at HDFC Bank.

The current account deficit reached a record 5.4 percent in the quarter that ended in September and is expected to end the 2012-13 fiscal year at its highest level ever.

“Although capital inflows, mainly in the form of portfolio investment and debt flows provided adequate financing, the growing vulnerability of the external sector to abrupt shifts in sentiment remains a key concern,” the central bank said.

In the government’s budget announced at the end of February, Finance Minister P. Chidambaram said the fiscal deficit would fall to 5.2 percent of gross domestic product in the current fiscal year and 4.8 percent in the next year, targets intended to help stave off a sovereign credit rating downgrade to “junk” status.

Article source: http://www.nytimes.com/2013/03/20/business/global/indian-central-bank-cuts-rates.html?partner=rss&emc=rss