India’s central bank is likely to keep interest rates on hold this week, analysts and economists said, as policymakers prepare to meet amid fresh signs of a slowdown in the fast-growing economy.
The Reserve Bank of India (RBI) is due to review monetary policy on Friday, having said in October that the likelihood of another hike in rates was ‘relatively low’.The RBI’s repo rate, at which it lends to commercial banks, is at a near three-year high of 8.50 percent. The reverse repo rate that it pays banks for deposits is at 7.50 percent — its highest in more than a decade.Governor Duvvuri Subbarao maintains that the succession of 13 rises since March last year was designed to tame spiralling inflation running at nearly 10 percent, even if it means that short-term growth takes a hit.But predictions of a softening of the bank’s hawkish stance have grown amid fears that meeting even the government’s revised growth target of 7.5 percent this year may be optimistic in the current economic climate.Business leaders have been at the vanguard of calls for a cut in interest rates or a pause in hikes to boost flagging investor confidence and re-energise growth.
Both the Federation of Indian Chambers of Commerce and Industry (FICC) and the Confederation of Indian Industry (CII) renewed their call for prompt action after the latest industrial output figures were announced on Monday.Output shrank 5.1 percent year-on-year in October, with the slump felt in key sectors such as manufacturing production, mining and capital goods.‘The industrial slowdown is taking very serious dimensions and there is an urgent need to improve sentiments if the downward trend has to be checked,’ said CII director-general Chandrajit Banerjee.The figures, which took analysts by surprise, dragged down the stock markets, with the Sensex index of 30 leading companies losing more than two percent, adding to a general downward trend this year.On top of that, the rupee plunged to record lows against the dollar on Tuesday, as investors sought a safe haven in the US currency largely due to uncertainty caused by the European debt crisis.Analysts saw the last rate rise in October as a possible sign that the cycle had reached its peak and predicted that the RBI may start to lower rates from next year once inflation has moderated.‘They will hold the rate steady on Friday,’ said D.K. Joshi, chief economist at analysts Crisil. ‘They will give a dovish guidance on the economy... I think the tone will change,’ he told AFP.The chairman of the Indian Prime Minister’s Economic Advisory Council, C. Rangarajan, said that a pause in rate increases ‘is something that’s likely to happen’.‘But whether or not going forward further action is required depends on what happens on inflation,’ he told the Business Standard newspaper in an interview published on Tuesday.
‘As inflation subsides, there might be a pause. We will have to see what inflation numbers we get,’ he was quoted as saying.Inflation figures for November are due out on Wednesday.Annual inflation, measured by the closely-watched Wholesale Price Index, rose to 9.73 percent in October from its September level of 9.72 percent.The RBI would also have to factor in the eurozone debt crisis, which is hitting growth around the world and has prompted other central banks to ease their monetary policy stance, analysts said.