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India Unexpectedly Holds Rate as Inflation Curbs Easing

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India unexpectedly left interest rates unchanged as the fastest inflation among the biggest emerging markets narrows scope to bolster a struggling economy.

Governor Duvvuri Subbarao left the benchmark repurchase rate at 8 per cent, the Reserve Bank of India said in a statement Monday. Only four of 25 economists in a Bloomberg News survey predicted the outcome, with 19 expecting a 0.25 percentage-point cut and the remainder a half-point reduction.

The decision contrasts with rate cuts in Brazil and China in the past three weeks as the impact of Europe’s turmoil fans through Asia and dominates the agenda of a Group of 20 summit starting in Mexico Monday. Subbarao’s room to counter the weakest Indian growth in almost a decade is being limited in part by a plunge in the rupee, which has stoked an inflation rate already above 7 per cent.

“Re-accelerating inflation, a still fragile rupee and the continued lack of action from New Delhi are limiting the RBI’s room for easing,” said Richard Iley, the Hong Kong-based chief economist for Asia at BNP Paribas SA. “Reform, not stimulus, is required to reboot India’s disappointing macro-economic performance.”

“While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent with sustainable growth,” the central bank said. “Importantly, retail inflation is also on an uptrend.”

The Reserve Bank said “future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks,” adding it “stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments” amid global risks.

Indian Prime Minister Manmohan Singh is grappling with an economy set back by trade and budget deficits, corruption scandals and infighting in the ruling coalition that has stymied his efforts to lure more foreign investment to ease bottlenecks.

Gross domestic product rose 5.3 per cent in the three months through March from a year earlier, the least since 2003, imperilling the prime minister’s goal of 9 per cent annual gains to cut poverty.

Standard & Poor’s has warned it may demote India’s credit rating to so-called junk status.

India’s benchmark wholesale inflation accelerated to 7.55 per cent in May, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China. The government’s projected fiscal deficit of 5.1 per cent of GDP in the year through March 2013 is the group’s widest.

Another report Monday showed Indian consumer prices rose 10.36 per cent in May from a year earlier.

“We’ll have a combination of weak growth and still-high inflation for longer,” said Rajeev Malik, a senior economist at CLSA Asia-Pacific Markets in Singapore. “The political will to implement solutions is still missing.”

The Reserve Bank lowered rates on April 17 for the first time since 2009, to 8 per cent from 8.5 per cent. It said at the time the weaker rupee, energy costs and India’s fiscal deficit posed inflationary risks that my limit room for further cuts.

India’s central bank in January and March reduced the amount lenders need to set aside as reserves by a combined 125 basis points, to 4.75 per cent, to ease cash shortages at banks.

“Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly investment, with the role of interest rates being relatively small,” the central bank said today. “Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.”

To boost credit flow to exporters, the central bank increased the eligible limit of the export credit refinance facility to 50 per cent from 15 per cent, starting the fortnight of June 30, the Reserve Bank said today. This will provide additional funds of over Rs300 billion to banks, it said.

The Indian government’s recent setbacks include the suspension in December of plans to allow foreign companies such as Wal-Mart Stores Inc to open supermarkets after a coalition ally objected.

Growth in Asia’s third-largest economy has also slowed after Subbarao raised rates by a record 3.75 percentage points from March 2010 to October 2011 to try and contain inflation.

Singh vowed on June 6 to revitalise growth outlining projects including new ports, roads and power plants. The impending resignation of Finance Minister Pranab Mukherjee to contest India’s presidential poll may prompt a cabinet overhaul that also seeks to shore up investor sentiment.

Singh is joining world leaders at the G-20 summit, beginning a week of crisis meetings taking place after Spain this month became the fourth euro-region nation to seek a bailout amid the weakest global economy since the 2009 recession.

(Source: Bloomberg)

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