Subbarao’s grim prognosis sends rupee tumbling to 10-month low

* 'Growth significantly moderated,risk factors remain,investments yet to pick up'

Written by ENS Economic Bureau | New Delhi | Published: May 31, 2013 1:17 am

Indian money markets skid sharply on Reserve Bank of India Governor D Subbarao’s adverse comments on the economy on Thursday in the last hour of trade.

The Governor said,“Growth is significantly moderated,inflation is somewhat off its peak but there are several upside risk factors,the balance of payments is under stress and investments have to pick up.”

The comments sent the rupee tumbling by 21 paise to end at new 10-month low of 56.38 against the dollar. Coming just a day before the government releases the data for the fourth quarter GDP for 2012-13 it was an affirmation that the numbers would be dismal.

Subbarao made the comments during a speech in Ahmedabad. It sent the Indian currency to a ten-month low against the dollar and also sent Government of India bond prices down.

Yields (which move opposite to prices) on the benchmark ten-year bonds rose by 5 basis points to close at 7.44 per cent,as the markets read the signal there will be no rate cuts on June 17 when RBI will conduct its mid-quarter review of the monetary policy. The downbeat remarks are in contrast to the confident tone of finance minister P Chidambaram about restoration of growth prospects.

“The economy has slowed down,business has slowed down (but) this year,I expect the economy to grow at least by 1 per cent more than last year,” the minister said last weekend.

Jayesh Mehta,MD and country treasurer at Bank of America said the RBI Governor’s comments added to the impact of the global skittishness in forex markets that US Federal Reserve chairman Ben Bernanke had created last week.

Bernanke had said there was a need to consider when the Fed should reconsider the flow of easy liquidity into the markets. “The comments at the fag end of the trading day created quite a surprise in the markets,” he said.

In the offshore non-deliverable forwards for rupee the one-month contract was at 56.74 to a dollar while the three-month was at 57.31.

Abhishek Goenka,CEO of India Forex Advisors said the governor was telling bluntly what the markets should have factored in.

“He is telling the reality,” said Goenka.

Subbarao also said India cannot take for granted the continuation of global easing of commodity prices. “Commodity prices,certainly softened in the last few months. But we cannot take the soft prices for granted.”

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