The Reserve Bank of India (RBI) is likely to begin easing monetary policy to address concerns about economic growth, governor Duvvuri Subbarao said in a BBC interview, comments which raised optimism in bond markets.
Yields on the benchmark 10-year paper was accordingly down marginally to 8.39% at the close of the trading day after shooting up to 8.63% in the morning. A lower yield reflects better prices for the papers and encourages banks to buy them.
Yields had risen after the government announced an extra borrowings of R40,000 crore on Friday, making this year?s additional borrowing R92,800 crore more than the budgeted figure of R3,44,000 crore ? a 27% rise. The governor?s comments cooled the markets on Monday morning.
?From here on, we could expect reversal of monetary tightening. But it’s difficult to say when that will take place and in what shape it will roll out,? Subbarao said, Reuters reported, citing an interview published on the BBC website on Monday.
Subbarao reiterated that growth was likely to be a bigger concern in 2012, although the risk of inflation remained, largely because of a weakening rupee. ?It is just that (through) much of 2011, inflation was so high that we had to give higher priority to inflation,? Subbarao said. ?But going forward, we acknowledge that growth is going to be a concern. In fact, in the December statement, we said growth is a serious concern; so I think the balance between growth and inflation will shift in 2012,? he said.
However, the HSBC India manufacturing PMI for December released on Monday showed inflation was still a concern. While the index rose to 54.2 in December from 51 in November driven by a jump in output growth and new orders, the inflation readings were not encouraging. ?All in all, the numbers suggest that it is too early for the RBI to replace inflation with growth as the main policy concern,? observed Leif Eskesen, chief economist for India and Asean, who pointed out that the strength in demand is continuing to provide firms with the ability to pass on cost increases and at an accelerated pace. ?A rate cut is, consequently, not just around the corner. There first have to be clear signs that core inflation pressures, and not just headline, is moving in the right direction on a sustained basis,? he added.
Inflation in November stayed above 9%, as it has for 22 consecutive months. In October, the RBI lowered its growth forecast for the Indian economy to 7.6% for the current fiscal year ending March from its previous forecast of 8.0%. India’s GDP grew at 6.9% y-o-y in the three months to September from 7.7% y-o-y in the June 2011 quarter. Gross fixed capital formation came in at a negative 0.6% while the trends in consumption remain unchanged though private consumption saw a slight deceleration.
Short-term pressure on the bank balance sheet has remained high. On Monday, banks borrowed R1,17,250 crore from the Reserve Bank of India through the repo window, higher than Friday’s R1,14,670 crore.