* RBI leaves repo rate at 7.25 pct; CRR stays at 4.00 pct
* Rupee weakens past 60 as RBI guides for return to
* Cbank chief says opposes sovereign bond issue
* RBI cuts India GDP growth forecast to 5.5 pct from 5.7 pct
By Suvashree Dey Choudhury and Tony Munroe
MUMBAI, July 30 India left interest rates
unchanged, but the rupee lost 1.8 percent against the dollar in
its deepest plunge in more than a month as investors worried
that further measures will be needed to support a currency that
is teetering close to a record low.
The dovish tone struck in the Reserve Bank of India's policy
statement had caused the rupee to sag, but it then crumpled when
Governor Duvvuri Subbarao poured cold water on chances for a
sovereign bond issue to help plug a yawning current account gap.
"In the Reserve Bank's view, the cost of a sovereign bond
issue, especially in the current juncture, outweighs benefits,"
Subbarao told reporters after delivering the final monetary
policy statement of his five-year tenure, unless it is extended.
As expected, the RBI left its policy repo rate
at 7.25 percent and held banks' cash reserve ratio
at a record low 4.00 percent, but said it will roll back recent
liquidity tightening measures when stability returns to the
currency market, enabling it to resume supporting growth.
Bond investors were initially cheered by that stance, but
lost heart once they saw the rupee begin to slide.
The partially convertible rupee tumbled past the
symbolically significant 60 per dollar, ending the day at 60.47.
"There were no rupee supportive measures in the policy, like
a hike in the policy rate," said Navin Raghuvanshi, associate
vice president at Development Credit Bank.
Earlier this month, the RBI took steps to tighten market
liquidity and push up short term interest rates in order to make
it harder to speculate against the currency after it hit a
record low 61.21 to the dollar on July 8.
"Markets will test the RBI again ... and possibly this will
provoke new RBI measures," said Dariusz Kowalczyk, senior
economist for Asia excluding Japan at Credit Agricole CIB in
Hong Kong. "The bank's credibility is at stake now that it is
targeting primarily the currency."
Subbarao is in a tough position. The rupee has given up all
the gains since the RBI's rescue measures on July 15, which came
at the cost of squeezing corporate borrowers and crimping
India's already weak growth outlook.
The longer the squeeze goes on the more likely it becomes
that commercial banks will have to raise their lending rates --
dealing another blow to an economy that grew at a decade low of
five percent in the last fiscal year.
Pratip Chaudhuri, the chairman of State Bank of India, the
country's largest bank, said his own bank would take a decision
in two or three weeks.
On Tuesday, the RBI cut its growth forecast for Asia's
third-largest economy to 5.5 percent from 5.7 percent for the
current fiscal year.
Subbarao said that, had the currency been stable, the growth
and inflation balance would have allowed for sticking with a
monetary easing stance.
"India is currently caught in a classic 'impossible trinity'
trilemma whereby we are having to forfeit some monetary policy
discretion to address external sector concerns," Subbarao said.
Subbarao repeated his call for the government to take urgent
steps to bring down a current account deficit that hit a record
4.8 percent of GDP in the last fiscal year.
However, New Delhi has struggled to implement measures to
attract foreign corporate investment, and with elections due by
May, Prime Minister Manmohan Singh's weak coalition government
has limited room for pushing through further reforms.
Officials in New Delhi said Finance Minister P. Chidambaram
would likely hold a news conference on the economy on Wednesday.
Chief Economic Adviser Raghuram Rajan said the government
was considering various ways to narrow the current account
deficit, including expanding exports.
The current account gap makes India especially vulnerable as
global investors move away from emerging markets in anticipation
of a winding down of loose U.S. monetary policy.
"Most external vulnerability indicators have deteriorated,
eroding the economy's resilience to shocks," Subbarao said.
Turkey, Brazil and Indonesia have all raised rates to
counter capital outflows.
Indian policymakers will be hoping the U.S. Federal Reserve
doesn't spark a fresh surge in flows away from emerging markets
when it holds its policy review this week.