RBI may leave rates unchanged: analysts

RBI may leave rates unchanged: analysts
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First Published: Thu, Aug 13 2009. 09 44 PM IST
Updated: Thu, Aug 13 2009. 09 44 PM IST
Mumbai: Worsening dry conditions in India threaten to dent a nascent recovery even as other parts of the economy show surprising strength, and may force the central bank to stick to its easy money policy longer than planned.
With time running out on the summer sowing season and increasingly gloomy reports from the country’s farm regions, economists warn that growth could lose as much as 2 percentage points in the current fiscal year if rains don’t improve soon. Between the start of the summer monsoon season on 1 June and Wednesday, rainfall was 29% below normal.
Despite June industrial output figures that far exceeded forecasts, as well as a surge in auto sales for July and signs of improving global conditions, some observers expect the Reserve Bank of India (RBI) to stick to its pro-growth bias given the possible hit to rural demand resulting from a bad monsoon.
“I would think RBI would like to play it a bit safe and not rush into tightening at this point of time,” said A. Prasanna, economist at ICICI Securities Primary Dealership. “There was a possibility after the July policy (review) that you could have had some move in October itself. Now, I think that probability is very low. So you’re looking at January as the earliest when RBI could begin tightening,” he said.
The inflation picture further complicates RBI’s job. Wholesale prices fell for the ninth straight week in the year through 1 August, but the food index gained 10%, and economists warn of looming inflation.
“Some of the potential threats that could slow down or even derail the recovery include a revival of inflation, high interest rates and persistent global sluggishness,” Subir Gokarn, Standard and Poor’s Asia-Pacific chief economist, wrote on Thursday.
RBI said in its policy review last month that price pressures were building, and raised its wholesale price inflation target to 5% at the end of this fiscal year from an earlier forecast of 4%. It left key policy rates unchanged after slashing rates by 425 basis points between October and April to curb domestic fallout from the global economic crisis.
“Weak monsoons will add to the pressure on the central bank on not doing anything much on the rate front quickly,” said Robert Prior-Wandesforde, senior Asia economist at HSBC in Singapore. “We are expecting the first rate hike only in April-June 2010, and I think money markets have got a bit ahead of themselves in pricing in a rate hike later this year,” he said.
The weather situation is “grim”, weather office chief Ajit Tyagi told ET Now television channel on Thursday, threatening crops in the current planting season as well as winter-sown wheat and rapeseed.
With just 40% of its crop land irrigated, seasonal rains are crucial to India’s agricultural economy, but at least one-fourth of its districts are threatened by drought. In a bid to reduce the damage, the government has curbed grain exports, stepped up sugar imports, redirected scarce electricity towards irrigation and cracked down on hoarding, among other measures.
An increasingly diversified economy, however, means a deficient monsoon has less of an impact on the overall economy than in past dry years, and strength in manufacturing and urban demand could offset disappointing crop output.
Agriculture makes up roughly 17% of the Indian economy, compared with nearly 30% in the early 1990s, but rural demand accounts for more than half of domestic consumption. Rising farm incomes served as India’s bulwark against the worst of the recent global downturn.
Private economists expect growth of 5.8-7.2% in the current fiscal year, while RBI expects growth of about 6%, with a bias to the upside. Growth in the most recent fiscal year slowed to 6.7% after three straight years of at least 9%. During the worst recent monsoon year, in the fiscal year that ended in March 2003, growth fell to 4% from 8% in the previous year.
Saikat Chatterjee contributed to this story.
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First Published: Thu, Aug 13 2009. 09 44 PM IST
More Topics: RBI | Monsoon | Sowing season | Economy | Rainfall |