Poll-bound India counts on RBI to revive economy

Poll-bound India counts on RBI to revive economy
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First Published: Mon, Apr 20 2009. 04 07 PM IST
Updated: Mon, Apr 20 2009. 04 07 PM IST
New Delhi: India’s central bank will have little choice but to keep cutting interest rates and buy more government bonds as it is left alone to help the economy during a likely political void produced by a general election.
Since the global financial crisis culminated last September with the collapse of Lehman Brothers, markets have often had an impression that the government and the independent central bank have been coordinating their responses to the crisis.
But as the election in the world’s largest democracy this month and next dramatically limits the current government’s scope for action, it is now solely up to the Reserve Bank of India to take charge.
Analysts are confident the central bank, even without the government’s backing or inspiration, will do whatever it can to steer Asia’s third largest economy through politically and economically turbulent period of the next few months.
“The prime tool would be interest rate cuts,” said D.K. Joshi, principal economist at credit rating agency ICRA, who expects the central bank to cut its repo rate by half a point on Tuesday and another half a point by June-July.
He also said the central bank will continue buying back government bonds from the market, to relieve upward pressure on market rates caused by the government’s heavy borrowing plans.
ROOM FOR CUTS
N.R. Bhanumurthy, economist at Institute of Economic Growth, said that unlike other central banks, which have already slashed rates to near zero, the Reserve Bank of India still had scope to do more.
“The government has exhausted fiscal policy options but there is some room for monetary policy action. We are in better situation in terms of monetary policy than other central banks,” he said.
The central bank has cut its key lending rate by 400 basis points to 5% in five steps since October and a slim majority of analysts polled by Reuters expects another cut this week.
Past monetary policy steps were, however, accompanied by government efforts, which on its part has cut some duties and taken other steps, including an additional spending plan of $4 billion.
But now any further stimulus will have to wait until well after the elections, when most main contenders promise to boost spending to help the economy recover from its current slowdown.
“I think the government will depend a lot more on the RBI to help revive demand and speed up economic growth.” said D.H. Pai Panandikar, president of private economic think tank RPG Foundation.
Expectations of more expansionary fiscal policy ahead combined with already record borrowing plans, have kept an upward pressure on market rates, taking the bite out of the past rate cuts and prompting the central bank to buy government bonds in the market. The benchmark 10-year bond yield rose by about 150 basis points this year, even though the central bank has cut rates by the same margin.
The central bank, however, has refused so far to buy bonds directly from the government, which would effectively mean printing money to finance public borrowing, and is expected to stay firm on the issue in the future.
As another measure to help direct more funds to the fast cooling economy, the central bank may revive a cap on funds that banks can park with the central bank via its reverse repo window.
India’s economic growth in the current fiscal year that started on 1 April is expected to slow to a seven-year low below 6 percent. Growth of about 6% is seen as a minimum that allows to create enough jobs for the nation’s workforce that keeps on growing by 2.5% per year.
Governor Duvvuri Subbarao, who was finance secretary before his appointment last year, has said the policy’s challenge was to arrest the slowdown that proved steeper than earlier thought, while limiting the market impact of heavy government borrowing.
“No matter what the new government is, no matter what the new budget is, it’s is quite clear that the borrowing for 2009-10 is going to be substantially higher than 2008-09,” he said.
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First Published: Mon, Apr 20 2009. 04 07 PM IST
More Topics: Government | India | RBI | Economy | Election |