RBI dithers on rates cut, Fitch snips growth outlook

Retail inflation surges; rupee takes a beating; indices crash

The week started on a gloomy note with the Reserve Bank of India dashing hopes of an interest rate cut and the rating agency Fitch downgrading India’s credit outlook to negative.

To add to the woes, retail inflation also surged to 10.36 per cent. This resulted in the crash of indices and the rupee.

But before the Fitch action, the RBI had already disappointed investors by maintaining status quo on the key policy rates contrary to expectations.

The RBI kept repo rate at 8 per cent and banks’ cash reserve ratio at 4.75 per cent, same as earlier, saying further reduction in the policy interest rate at this juncture could exacerbate inflationary pressures. The move sent shock waves to the stock market, which shed 244 points.

The bank noted that though core inflation has stabilised, concerns over rising headline and retail inflation rates, which have a bearing on inflation expectations, remained high. However, to check the the negative sentiments, the government intervened saying that the rating agency has used old data and had completely ignored  recent positive trends in the Indian economy.

“A significant loosening of fiscal policy, which leads to an increase in the gross general government debt to GDP ratio, would result in a downgrade of India's sovereign ratings,” Fitch said in a statement.

The global agency also said it expects the Indian economy to grow just 6.5 per cent in the current fiscal year, down from its earlier forecast of 7.5 per cent, while it expected the headline inflation to average 7.5 per cent.

“India also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms,” it said.

“While the markets had already anticipated that Fitch would revise the outlook and so there is no surprise in the announcement, it must be pointed out that Fitch has primarily relied on older data, and has ignored the recent positive trends in the Indian economy,” Finance Minister Pranab Mukherjee said.

Chief economic adviser Kaushik Basu attributed Fitch’s action to a “herd mentality” among ratings agencies. He, however, said there is a lot to be done to revive the strength of Indian economy and make a turnaround.

Fitch’s remark, which came just two months after Standard and Poor’s downgraded India’s rating, sent the rupee depreciating below the psychological 56 mark and heightened fears of India losing its credit rating to junk if the government did not take significant steps on the macro-economic front.

While India’s inflation in May accelerated to 7.55 per cent from 7.23 per cent in April, economic growth slowed to nine-year low of 5.3 per cent in January-March and the factory output in April nearly stalled.

Adding fuel to the fire, India’s retail inflation surged 10.36 per cent in May, adding further pressure on the government to augment supply-side measures to cool prices.

The CPI inflation rose on the back of higher vegetable, milk and edible oil prices. The latest data on retail inflation comes on the back of an already high Wholesale Price Index, prompting economists to say government needed to check rising support prices of food grains that are having a negative bearing on surging prices.