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India’s central bank may lower lending rate following US interest rate PDF Print E-mail
Tuesday, 29 January 2008

Agence France-Presse .

Mumbai India’s central bank may lower its key lending rate this week following the substantial cut in US interest rates and end a monetary tightening cycle that began in 2004, economists say. Analysts had expected the central bank — wary about the impact of sharp rises in global oil and commodity prices — to keep rates on hold in 2008.

But fears about a global slowdown that could hit Indian growth and the US Federal Reserve’s unprecedented 0.75 percentage point cut last week in its main lending rate to 3.50 per cent has sparked expectations that the bank will end its hawkish stance. It could even cut rates at its policy meeting on Tuesday. The Reserve Bank of India has been focused on inflation and now ‘looks set to give greater priority to its other objective — growth,’ said HSBC economist Robert Prior-Wandesforde.

‘We now expect two 25-basis-point rate cuts this year, possibly starting at next Tuesday’s central bank meeting,’ he said. India’s government says it expects growth of nearly nine per cent for this fiscal year to March 2008 while the central bank is targeting 8.5 per cent. Nine interest rate hikes since 2004 have slowed consumer demand and threatened to curb growth more sharply. Inflation, which hit a two-year high of nearly seven per cent early last year, has been edging higher but running at 3.83 remains well below the Reserve Bank’s ceiling of close to five per cent for this fiscal year.

The bank’s leading short-term lending repo rate is riding at a four-year high of 7.75 per cent, pushing the cost of commercial loans into double-digit figures and hitting consumer consumption. ‘Given the 75 basis points Fed cut, the probability of the RBI cutting rates goes up significantly,’ said Rohini Malkani, an analyst at Citigroup in India. ‘Loan growth has decelerated to 21.5 per cent, below the Reserve Bank’s targeted 24.5 per cent for the year to March 2008,’ she said, having surged to more than 30 per cent the previous year.

The rising US-India rate gap is also a concern, economists say. The US rate cut swelled the differential to 425 basis points — its widest in over three years — which could lead to higher capital inflows and more rupee appreciation. That would hit India’s exports, already suffering from a rupee that rose by more than 11 per cent in 2007. Other economists, however, said while the bank may soften its hawkish tone, it is likely take a wait and see stance.

‘It’s too soon to assess the impact of the Fed rate cut in the context of volatile global financial markets,’ said Shubhada Rao, chief economist at India’s Yes Bank. Finance minister P Chidambaram said keeping inflation low was a government priority. The Congress-led administration, with its eye on general elections due in 16 months, is mindful that rising prices can be political dynamite among the masses who helped propel it to power in 2004. ‘We’re comfortable with inflation below four per cent and growth above eight per cent,’ Chidambaram said last Friday. ‘Between inflation and growth, what hurts the poor most is the inflation. That’s why we must keep inflation low.’

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