NDTV: A spate of long-delayed reforms unleashed by India to shore up government finances is unlikely to be rewarded by an immediate interest rate cut, with the Reserve Bank of India expected to hold rates steady on Monday as it wages a protracted battle with inflation.
In an unexpected 24-hour frenzy, New Delhi opened its supermarkets and airlines to foreign investment, raised the price of subsidised diesel and announced planned share sales in four state companies as it looks to jump-start flagging growth.
The measures aim to rein in a ballooning fiscal deficit and avoid a credit rating downgrade to junk.
“As an immediate impact, business and consumer sentiment will improve, the stock market will improve,” said Samiran Chakraborty, an economist at Standard Chartered Bank.
“But I don’t think the RBI will cut rates after these measures because the impact of these steps on the supply side will only be in the medium term.”
The RBI has held borrowing costs steady since a deeper-than-expected 50 basis point cut in April, and has repeatedly called on the government to do its part by improving its fiscal position.
Thursday’s diesel price hike had initially prompted market participants to speculate that the RBI may lower interest rates on Monday, but a spike in August inflation data on Friday from July’s near three-year low put a damper on such expectations.
India’s wholesale price index rose a higher-than-expected 7.55 percent in August from a year earlier, mainly driven by higher food prices.
SERIOUS ABOUT REFORM
The diesel price rise will aggravate short term inflation.
But, along with the measures unveiled on Friday to liberalise ownership of supermarkets and other industries, it shows the government is serious about fiscal consolidation and encouraging investment and may make RBI Governor Duvvuri Subbarao more inclined to ease monetary policy sooner rather than later.
The government kicked into gear late last week after a wave of corruption scandals had weakened it and led to months of little substantive policy action, souring investor sentiment and putting at risk India’s investment-grade credit rating.
Analysts have cut their economic growth forecast for the current fiscal year – some to as low as 5.1 percent – amid stalling industrial and manufacturing activity and concerns about the current account and fiscal deficits and lack of reforms. By comparison, the prime minister’s economic advisory panel’s trimmed-down forecast of 6.7 percent looks optimistic.
In a Reuters snap poll of 18 economists on Friday, all but two expected the RBI to leave its policy repo rate unchanged at 8 percent, in line with a poll conducted earlier this month.
The snap poll was taken before Friday’s reform announcements.
The median estimate for the repo rate at the end of 2012 was 7.75 percent, unchanged from the previous poll.
Meanwhile, the U.S. Federal Reserve’s aggressive stimulus plan last week complicates the RBI’s task, as the injection of liquidity delivered by the Fed’s measures may push up global commodity prices and add to inflationary pressures in India.
Copyright @ Thomson Reuters 2012