Global Investing

India: the odd BRIC out

December 1, 2011

China moved to ease policy this week via a reserve ratio cut for banks, effectively starting to reverse a tightening cycle that’s been in place since last January. Later the same day, Brazil’s central bank cut interest rates by 50 basis points for the third time in a row. Both countries are expected to continue easing policy as the global economic downturn bites. And last week Russia signalled that rate cuts could be on the way.

That makes three of the four members of the so-called BRIC group of the biggest emerging economies. Indonesia, the country some believe should be included in the BRIC group, has also been cutting rates. That leaves India, the fourth leg of the BRICs, the quartet whose name was coined by Goldman Sachs banker Jim O’Neill ten years ago this week. India could use a rate cut for sure. Data this week showed growth slowing to 6.9 percent in the three months to September — the slowest since September 2009. Factory output slowed to a 32-month low last month, feeling the effects of the global malaise as well as 375 basis points in rate increases since last spring. No wonder Indian stocks, down 20 percent this year, are the worst performing of the four BRIC markets.

But unlike the other BRICs, a rate cut is a luxury India cannot afford now — inflation is still running close to double digits.  “The Reserve Bank of India (RBI) is the odd guy out due to stubbornly high inflation of near 10 percent,” writes Commerzbank analyst Charlie Lay.

True, inflation in the other BRICs is also running above target. But nowhere is it as stubborn as in India, and that is due to antiquated infrastructure and supply side bottlenecks. Half-hearted policy reforms means this will remain a problem. Where India differs from the other BRICs is also its large current account deficit of over 4 percent of GDP. This was one reason why the rupee was the hardest hit emerging currency during the November selloff, losing almost 7 percent. Its depreciation adds 30-50 basis points to headline inflation, analysts reckon.

But inflation is broadly expected to start easing from the second quarter of 2012, allowing the RBI to follow other emerging markets and finally start cutting rates. For now though, the best that can be hoped for is that rapidly cooling growth will force the RBI to keep interest rates on hold.

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