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RBI may extend cuts on lower inflation

RBI may extend cuts on lower inflation
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First Published: Sun, Dec 21 2008. 10 19 PM IST
Updated: Sun, Dec 21 2008. 10 19 PM IST
New Delhi: India’s central bank has scope to extend the steepest set of interest-rate cuts since 2000 after inflation slowed to a nine-month low, economists said.
The country’s benchmark 10-year bonds on Friday completed the biggest weekly gain in at least a decade as investors speculated the Reserve Bank of India will add to the three interest-rate cuts of the past two months. A report this week showed inflation slowed more than the economists expected, to 6.84% in the first week of December.
Easing inflation may alleviate the central bank’s concern earlier this week that faster than “acceptable” price gains have made monetary-policy management more complex amid slowing growth. The RBI’s actions should have been “more aggressive” to counter the global recession, according to Arvind Virmani, the finance ministry’s chief economic adviser.
Bonds rallied after the 18 December inflation report. The yield on the 8.24% note due April 2018 dropped 66 basis points this week to 5.56% in Mumbai, according to the central bank’s trading system. RBI hasn’t commented on the latest inflation data.
Slowing inflation is prompting central banks from the US to Malaysia to cut interest rates as global economies slump amid the worst financial crisis since the Great Depression.
Growth in Asia’s third largest economy may slow to 7% in the year ending 31 March from 9% or more annually in the previous three years as the global slump hurts exports, according to the government. India’s industrial production fell 0.4% in October, the first decline in 15 years, and exports plunged 12%.
To revive consumer demand and lending, RBI on 6 December cut its benchmark repurchase (repo) rate to 6.5% from 7.5%, the third reduction since 20 October. The following day, the government announced a $4 billion stimulus package to bolster spending, including lower taxes on consumer goods such as cars, television screens and motorbikes.
The central bank will review its inflation forecast in the 27 January monetary policy meeting, governor D. Subbarao said on 11 December, signalling he may lower an earlier estimate of 7% for the current fiscal year.
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First Published: Sun, Dec 21 2008. 10 19 PM IST