India cuts reserve ratio to boost growth while holding rates

Inflation Risk

Subdued expansion has affected companies such as motorcycle manufacturers, with sales in an industry that includes Hero Motocorp Ltd. and Bajaj Auto Ltd. down 4.5 percent last month, the first fall since January 2009, according to the Society of Indian Automobile Manufacturers.

The central bank has previously flagged inflation risks from the longer-term drop in the rupee, the prospect of costlier food as a below-average monsoon crimps farm output and the budget deficit. The rupee is down 12.3 percent in the past year.

Subbarao lowered the repurchase rate by 0.5 percentage point in April to 8 percent, the first reduction since 2009. The Reserve Bank has said that move “frontloaded” a cut on the assumption the government will restrain the budget shortfall.

Diesel prices rose about 14 percent under last week’s effort to curb subsidies. The climb will add as much as 72 basis points to headline inflation, keeping it at an average of 7.5 percent to 8 percent until December, Morgan Stanley said. It was 7.55 percent last month.

Credit Rating

Singh needs to limit subsidies to meet the goal of narrowing the budget deficit to 5.1 percent of gross domestic product in the fiscal year through March 2013, from 5.8 percent.

Standard & Poor’s and Fitch Ratings said earlier this year India’s budget and trade gaps imperil its investment-grade credit rating.

The reform measures appear credit positive even as they carry “considerable execution risks” due to opposition within the ruling Congress-led coalition and the recent track record of policy reversals, Fitch Ratings said in a statement today.

Moody’s Investors Service said in a statement the effect of reform measures outweigh any credit-positive benefits because they are too small or carry rollback risks.

Bloomberg News

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