India's central bank is likely to keep interest rates unchanged at 30-year lows over the next six months to help sustain an economy at risk from insufficient monsoon rains, analysts say.
The Reserve Bank of India (RBI) is likely to stand pat on rates at least until December, despite pressures from global monetary tightening and domestic inflation, as it tries to keep Asia's fourth-largest economy on track for 6 percent growth.
India's key bank rate, used to price loans, is at a three-decade low of 6.0 percent and the short-term repo rate is at 4.5 percent. Both were left unchanged in May, when the central bank presented its annual policy.
Until recently, analysts had expected official rates would be raised in October's mid-term policy review to curb demand-led inflationary pressures in the robust economy, and in line with a global tightening cycle.
But a patchy monsoon has prompted economists to lower growth forecasts and scale back expectations of a rate rise.
"I do not think the RBI will do anything that will hamper growth," said Shubhada Rao, economist with Bank of Baroda. "With the farm sector likely to grow at just about 1 percent, I think overall growth will be a little over 6 percent."
India's economy expanded at 8.2 percent in the financial year to March 2004, helped by the best monsoon in a decade, which saw farm output grow by over 9 percent. In July, the government estimated at least 7 percent growth for the current fiscal year.
About 600 million of the billion-plus population depend on agriculture, which generates a quarter of gross domestic product and is a crucial driver of demand for manufacturing and services.
The June-September south-west monsoon provides 80 percent of India's annual rainfall but has been below normal in the country's north-western states this year.
Rain is the only irrigation source for two-thirds of cultivated land, making the monsoon crucial for farm output.
INFLATION WATCH: Analysts said insufficient rains could push up food prices later in the year. Along with firm prices of crude oil, the bulk of which India imports, this could feed inflationary pressures.
But the rises would be fuelled by supply-side factors as a slowdown in economic growth dampened demand, giving the central bank room to leave rates unchanged, analysts said.
"A poor monsoon will be slightly inflationary, although the composition of the drivers of inflation will rotate - weak agricultural output may raise food inflation but demand-led inflation pressure will wane - allowing the central bank to postpone tightening interest rates," J.P. Morgan said in report.
The closely-watched annual wholesale price inflation rate was at 6.52 percent in the week to July 17, much higher than the central bank's estimate of 5 percent for the financial year to March 2005, but senior central bank officials are optimistic it will ease.
One of the biggest risks to the accommodative monetary policy would be if the United States raised rates aggressively and the rupee weakened sharply due to dwindling capital inflows, central bank officials have said.
RBI Governor Y.V. Reddy said in June he would revisit the annual monetary policy statement if the Fed raised rates at a faster than expected pace. The comments triggered a rise in federal bond yields.
The 10-year benchmark bond is at 6.20 percent, off a record low of 4.94 percent hit last October.
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