Sunday, June 17, 2012

India’s central bank will decide whether to cut rates or not

India’s central bank will decide whether to cut rates Monday, only hours after Greece election results are expected to be out.
Greek politics is not normally foremost on the mind of Reserve Bank of India Governor Duvvuri Subbarao.
But Greece’s economic problems have become a major issue for India.
The global economic uncertainties the euro-zone debt crisis have unleashed also have led to a pullback in global capital from risky markets like India — an outflow that Indian policymakers blame for the rupee’s fall to record lows against the U.S. dollar.
Greece’s elections are basically a referendum on how much austerity the country’s voters can stomach after years of state overspending.
Signs Greece is willing to rein in spending would cheer markets. The final results is likely to be announced late night in Athens, which will be in wee hours of Monday for India.
Mr. Subbarao, of course, won’t be fixated solely on Greece. His own nation’s twin budget and trade deficits, slowing growth and persistently high inflation are a major worry for monetary policymakers.
The question is how to kick start growth –and counter the slowing global economy — without allowing inflation to get further out of control.
Samiran Chakraborty, head of research at Standard Chartered Bank, said the central bank honchos will be watching the Greek situation closely, although the elections themselves likely won’t affect Monday’s decision.
It will be a while after the Greek polls before the world could assess the full impact of the outcome, he said.
A slowdown in Europe is a major negative for India, whose IT exports to the U.S. are already down this year.
Indian exports in May fell 4.2% on year, government data showed.
India’s Financial Stability Development Council – an agency that coordinates among different financial regulators to monitor any systemic risk – Thursday reviewed recent developments in the eurozone and the U.S. and their possible implications for India, the central bank said in a release.
Mr. Subbarao, speaking Thursday in the southern city of Hyderabad, attempted to calm markets.
The central bank has a war chest of foreign currency reserves that would prevent a 1991-like balance of payment crisis, he said.
India had to pledge tonnes of gold with the International Monetary Fund in mid-1991 to seek an emergency loan after it was barely left with enough foreign exchange reserves to cover its external payment liabilities.
The country today has foreign exchange reserves of over $286 billion, allowing the RBI to intervene in the foreign exchange market to support the rupee.
The Indian rupee has depreciated nearly 20% against the dollar in the last year as the country’s poor fiscal health and an uncertain global backdrop has exacerbated capital outflows.
Some economists say eurozone problems would still remain even if Greece takes austerity measures.
“The problem is much broader. There is Portugal, Italy and Spain besides Greece that have problems in varying measures,” said a senior economist at a foreign bank.
RBI is better off assessing the broader impact and could join  other central banks in a coordinated action instead of taking ad-hoc measures to handle the Greek situation, she said.
The U.S. Federal Open Market Committee meeting next week will also be in focus given the rising expectations of another round of quantitative easing, analysts said.
For Monday, though, the RBI is likely to cut its key lending rate by 0.25 percentage point to spur growth after January-March GDP growth slowed to a near 10-year low

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