India rate cut hinges on deficit, food costs

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India rate cut hinges on deficit, food costs
Raghuram Rajan is looking to contain the broader effects of a jump in food prices in India.

Mumbai - A survey of economists suggests the central bank will hold its repurchase rate at 6.75 per cent.

By Bloomberg

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Published: Mon 30 Nov 2015, 11:00 PM

Last updated: Tue 1 Dec 2015, 11:06 AM

India's most accurate interest rates forecaster predicts central bank governor Raghuram Rajan will refrain from cutting borrowing costs for at least two quarters as fiscal policy and food inflation threaten to spoil his work.
"The precondition for the next rate cut will be fiscal consolidation, passage of key economic reforms and food inflation behaving well," said Gaurav Kapur, a senior economist in Mumbai at Royal Bank of Scotland Group, ranked first by Bloomberg for predicting Reserve Bank of India (RBI) actions over two years.
"If there is a general comfort that food will not play a spoilsport over the next six months, then the RBI may have a window of opportunity to reduce rates after the budget," typically in February, he said.
A pause till June will be the longest since the nine months ended December 2014, when concern deficient rains will stoke food costs kept Rajan from easing.
A Bloomberg survey of economists suggests the central bank will hold its repurchase rate at 6.75 per cent on Tuesday, after cutting it 125 basis points this year, including a larger-than-estimated 50 basis points on September 29.
Rajan's job has been complicated by a proposed increase in salaries of millions of civil servants that could boost consumption and derail plans to curb the deficit.
Surging prices of pulses, a staple in Indian diet, threaten to further accelerate consumer price gains that reached a four-month high of five per cent in October, matching the RBI target for March 2017.
While Rajan said he is looking to contain the broader effects of a jump in food prices, which make up about half of the CPI basket, some issues are beyond his control. Lentil costs have soared following another year of poor monsoon that parched vast tracts of farm land, prompting Prime Minister Narendra Modi's administration to plan building up a buffer stock of pulses from imports.
Even as India's increasing population, growing incomes, rising rural wages and changing dietary habits have swelled demand for pulses, supply has failed to catch up, causing prices to spike, especially in times of a "monsoon shock," according to Crisil.
Consumer food price gains accelerated to 5.25 per cent in October from a year earlier, led by a 42 per cent surge in price of pulses.
"The rise in pulse prices can have a large impact on inflation expectations and can influence wage price negotiations," Crisil economists wrote this month.
The Indian Institute of Pulses Research forecasts demand at 39 million tonnes by 2050, which requires output to grow at 2.2 per cent annually, compared with the 0.9 per cent seen in the last decade, according to the report.
A panel appointed by India's finance ministry this month recommended a 23.55 per cent increase in the salaries and allowances of federal government employees. The recommendations, if accepted, will cost the administration Rs1.02 trillion ($15.3 billion) in the year starting April 1 and also threaten to fuel inflation.

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