India, a hawk among central bank doves

July 31, 2012

So India has not joined emerging central banks’ rate-cutting spree .  After recent rate cuts in Brazil, South Korea, South Africa, Philippines and Colombia, and others signalling their worries over the state of economic growth,  hawks are in short supply among the world’s increasingly dovish central banks. But the Reserve Bank of India is one.

With GDP growth slowing to  10-year lows, the RBI would dearly love to follow other central banks in cutting rates.  But its pointed warning on inflation on the eve of today’s policy meeting practically sealed the meeting’s outcome. Interest rates have duly been kept on hold, though in a nod to the tough conditions, the RBI did ease banks’ statutory liquidity ratio. The move will free up some more cash for lending.

What is more significant is that the RBI has revised up its inflation forecast for the coming year by half a  percentage point, and in a post-meeting statement said rate cuts at this stage would do little to boost flagging growth. That, to many analysts, is a signal the bank will provide little monetary accommodation in coming months. and may force  markets to pedal back on their expectation of 100 basis points of rate cuts in the next 12 months.  Anubhuti Sahay at Standard Chartered in Mumbai says:

On economic growth, though the moderation has been noted, the RBI sees limited role of rate cuts in stimulating growth. Overall, it affirms our view that any rate cut from the RBI is unlikely in the rest of 2012.

Elsewhere in emerging markets too, no rate cuts are expected this week, with Czech and Romanian central banks likely staying on hold when they meet on Thursday.

Czech rates were cut in June to record lows but analysts reckon that fear of further currency weakness, especially against the dollar will prevent the central bank from cutting rates any further this year.  In Romania, a raging political storm and doubts over the fate of an IMF loan deal has pushed the leu currency to record lows meaning the central bank has little room at the moment to move  interest rates lower.

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