Rajan unexpectedly raised the benchmark repurchase rate to 7.5% from 7.25% last week to rein in inflation and eased some of the cash curbs the central bank, under his predecessor Duvvuri Subbarao, imposed to support the currency.
Investors remain skeptical whether the RBI alone can fix the economy, which Goldman Sachs Group Inc. predicts will expand 4% in the fiscal year through March. While the rupee has rebounded 11% from an unprecedented 68.845 per dollar on Aug. 28, Goldman sees a decline to 72 by the first quarter of 2014. Macquarie Group Ltd. predicts a drop to 75.
“Investors, it seems, have some expectations from the new governor, but India faces long-term issues and they can’t be solved in a short period of time,” Kim Jin Ha, the Seoul-based head of global fixed income at Mirae Asset Global Investments Group, which managed $56.25 billion worldwide as of July 31, said in a Sept. 17 interview. “Policy action not coordinated with local government might bring another headwind.”
Weakened by corruption scandals and the loss of allies, Singh’s government has passed the fewest bills ever by an administration sitting a five-year term. That is allowing imbalances to build in Asia’s third-largest economy.
The current-account deficit widened to a record 4.8% of gross domestic product in the fiscal year ended March 31, while the 4.9% shortfall in public finances was the highest among the four largest developing nations. The World Bank estimates more than 800 million people live on less than $2 per day in India, where consumer-price inflation has held close to 10% for more than a year.
Data this month showed gains in wholesale prices unexpectedly accelerated to a six-month high of 6.1% in August. Every 10% decline in the rupee adds as much as 80 basis points, or 0.80 percentage point, to wholesale-price inflation, Nomura Holdings Inc. estimates show.
The rupee’s tumble prompted comparisons with the balance of payments crisis India faced in 1991, when the government airlifted gold to pledge as collateral for an International Monetary Fund loan as foreign-exchange reserves slid. India won’t face a repeat of that situation as it has enough reserves for about seven months of imports, compared with 15 days back then, Singh said last month. The nation had a $247 billion currency stockpile as of Sept. 13.
“In the near term, we are more cautious on India,” Roland Mieth, senior vice president of emerging markets at PIMCO Asia Pte Ltd., a unit of the company that runs the world’s biggest bond fund, said in an interview in Singapore on Sept. 16. “Although an outright credit default remains unlikely, the chance of a sovereign downgrade by one of the major credit agencies is large in the next 12-18 months.”