Mumbai: The risk of a US recession will be an important consideration at next week’s policy meeting of the Reserve Bank of India (RBI), as the global outlook is now more uncertain than a month ago, the bank’s governor said on Monday.
Speculation of a rate cut at the 29 January review has increased on the back of expectations of another US rate reduction. Although many analysts are still uncertain, a cut would be the first in more than three years. “I think we will pay considerable attention to that subject and the monetary policy statement will take note of it,” RBI governor Y.V. Reddy said in Mumbai when asked if the possibility of a US recession would be a factor in the Indian policy decision.
In December, Reddy had said the December rate cut by the US Federal Reserve was a relevant but not determining factor in Indian monetary policy. On Monday, the governor said the turbulence in global financial markets as a result of the US subprime crisis had been greater than expected.
“On a very preliminary basis, I should say these financial global uncertainties were not entirely unanticipated,” he said. “The intensity was somewhat not predicted nor was the duration. So, the outlook seems far more uncertain for global situation than before.”
Indian bond yields eased towards their lowest in a year on Monday as stocks tumbled, giving rise to expectations of a near-term rate cut. The 10-year bond ended at 7.54%—slightly above a one-year low of 7.51% hit earlier this month.
The central bank has kept its main short-term lending rate on hold at 7.75% for nearly 10 months, after raising it five times between between June 2006 and March 2007—3.5 percentage points above the US federal funds rate of 4.25%.
If the Fed Reserve cuts rates by 50 basis points as widely expected at its meeting on 29-30 January, it could boost capital flows to higher-yielding assets in India and pressure the rupee to rise. Still, analysts say Reddy may sit tight for the time being.
“My sense at this stage is that he will probably stay on hold this time, but going forward he might go in for an interim cut,” said Abheek Barua, chief economist at HDFC Bank Ltd. “Growth concerns will get much emphasis than in the past.”
RBI intervened throughout 2007 as the rupee rose 12% against the dollar and traders say the central bank has been active this year trying to stop the currency hitting 10-year highs.
Low inflation offers some room for an interest rate cut, although the government is considering raising state-set retail fuel prices and food prices remain a concern. Reddy said high food and oil prices would continue to shape inflationary expectations. “Almost for more than a year, we had been very sensitive to that and we will continue to be sensitive to that,” he said.