India Rate-Cut Room Dented as Rupee Drops Most in Asia to Record; “Currency stability has become a new worry”

India Rate-Cut Room Dented as Rupee Drops Most in Asia to Record

The slump in the rupee to a record low has narrowed the Reserve Bank of India’s scope to cut interest rates next week for a fourth straight meeting. Governor Duvvuri Subbarao will keep the repurchase rate at 7.25 percent on June 17, 10 of 18 analysts said in a Bloomberg News survey. The rest called for a reduction to 7 percent. The currency’s 6.6 percent drop versus the dollar this quarter, the biggest in Asia, threatens to make imports more expensive. The rupee reached its weakest level yesterday, weighed down by an unprecedented current-account deficit, the slowest Indian economic expansion in a decade and speculation the dollar will gain if the U.S. scales back monetary stimulus. Subbarao said May 30 that depreciation may stoke inflation and increase the cost of servicing foreign-currency debt.

“Currency stability has become a new worry,” said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore. “A rate cut is unlikely to do much in reviving growth, but it will renew the pressure on the rupee to weaken further.”Concern the Federal Reserve may taper asset purchases as the U.S. economy expands has buffeted most Asian currencies since March 29. The rupee’s drop exceeds the 4.9 percent decline in Thailand’s baht, the 4.8 percent slide in the Philippine peso and the fall of about 4.7 percent in Japan’s yen. China’s yuan has appreciated 1.3 percent in the period.

The rupee closed down 1.8 percent to 58.1375 per dollar yesterday. The S&P BSE India Sensex (SENSEX) index rose 0.1 percent, while the yield on the 7.16 percent government bond maturing in May 2023 climbed to 7.28 percent from 7.24 percent on June 7.

‘More Acutely’

“India is feeling the pain more acutely because the starting point was very weak due to a record-high current-account deficit,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. The central bank will probably focus on financial stability rather than a rate cut next week, she said.

The imbalance in the broadest measure of trade widened to $32.6 billion in the last quarter of 2012, equivalent to 6.7 percent of gross domestic product, fanned by gold and oil imports and subdued exports.

Subbarao said June 7 that India has a “current-account problem” and added that while inflation has “come off the peak,” consumer-price growth still remains “quite high.”

Wholesale prices rose 4.89 percent in April from a year earlier, a 41-month low, while the consumer-inflation index climbed 9.39 percent. Gross domestic product rose 5 percent in the year ended March, the slowest pace since 2003.

Borrowing Costs

The Reserve Bank reduced borrowing costs by a combined 75 basis points to 7.25 percent in January, March and May as the government pared the budget deficit to tackle price pressures. Subbarao indicated after the May 3 cut that the nation has almost no space left to ease further.

Prime Minister Manmohan Singh began changes in September to spur growth, woo investment and avert a credit-rating downgrade.

The steps have included liberalization in the retail and aviation industries, faster approvals for public works, lower levies on overseas buyers of local bonds and higher taxes on gold imports.

Etihad Airways PJSC agreed in April to buy a 24 percent stake in Mumbai-based Jet Airways (India) Ltd. for 20.6 billion rupees ($354 million), taking advantage of reduced restrictions.

Singh’s policy push foundered in recent weeks as protests over alleged graft in government disrupted parliament, impeding bills seeking to lure more foreign capital, simplify taxes and provide more land for industry.

“The need of the hour is constructive government actions to jump-start investment projects and greater policy clarity,” said Malik of CLSA. “The RBI’s rate cuts cannot offset the lack of adequate delivery by the government.”

To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net