Mumbai: The Reserve Bank of India kept its policy rate steady Wednesday, as widely expected, after inflation accelerated to a seven-month high and stronger economic growth reduced the need for monetary stimulus.
All but two of 54 analysts in a Reuters poll had predicted the repo rate would be left unchanged for a second straight meeting at 6.00 per cent, its lowest since November 2010.
The RBI also kept the reverse repo rate unchanged at 5.75 percent.
The decision to stand pat was widely expected after the annual rate of consumer inflation increased in October to 3.58 percent, driven by higher food and crude oil prices. That’s still low by Indian standards, but not far from the central bank’s 4 per cent target.
Nonetheless, the RBI left its policy stance “neutral” while slightly softening its language on inflation by saying risks were “evenly balanced”.
Many analysts believe the RBI will keep rates on hold in coming months, including at its next policy meeting in February, as it watches inflation trends.
“The global policy rate cycle and (rising) commodity prices, along with the consolidated fiscal position, will keep the RBI cautious,” said Suvodeep Rakshit, a senior economist with Kotak Institutional Equities in Mumbai.
Government officials have been calling on the RBI to cut rates given the economy, though recovering from July’s bumpy launch of a national sales tax, is not yet growing fast enough to create the jobs needed for the country’s young workforce.
“We have a neutral stance, which means that depending on the data flow in coming months and quarters we’ll determine what we do regarding the policy,” RBI governor Urjit Patel told a news briefing after the decision.
“All possibilities are on the table, and we would look carefully at both the inflation data and growth data that comes in coming months.”
Five members of the Monetary Policy Committee (MPC) voted to keep rates unchanged, while one voted for a 25 basis point (bp) cut.
Indian bond prices have slumped in recent weeks as investors sharply pared expectations for rate cuts.
The central bank took advantage of an extraordinary period of low inflation, including a slump in food and energy prices, to cut rates by a total of 200 bps from January 2015 until August this year, when it last cut the repo by 25 bps.
But those factors are now reversing, with crude prices rallying and food prices expected to climb further.
Moreover, a growing number of global central banks, including most recently South Korea’s, are tightening policy, with the US Federal Reserve expected to hike rates again next week.
There is also growing uncertainty on whether the government will have to borrow more as it struggles to meet its fiscal deficit target, which could add to price pressures.
The RBI Wednesday slightly raised its inflation projection by 10 bps to between 4.3 per cent and 4.7 per cent in the six months ending in March 2018.
It also retained its projection for gross value added growth, a measure of economic expansion it prefers, at 6.7 per cent for the year ending in March, the same as its forecast in October. (Reuters)
