India Holds Rates as Inflation Nears Central Bank’s Target

India’s central bank kept interest rates unchanged as rebounding inflation limits room to spur an economy struggling to recover from disruptive government policies.

The benchmark repurchase rate was left at 6 percent, the Reserve Bank of India said in a statement in Mumbai on Wednesday. Five of the six-member monetary policy committee voted for the move, which was predicted by 42 of 48 economists in a Bloomberg survey with the rest seeing a cut to 5.75 percent.

The decision reflects the RBI’s concern about price pressures that are nearing its medium-term target. Supply chains have been broken and growth stayed below potential following the roll out of a new consumption tax and Prime Minister Narendra Modi’s withdrawal of high-value currency notes, pushing his advisers to seek lower borrowing costs even as global central banks tighten.

“The MPC remains committed to keeping headline inflation close to 4 percent on a durable basis,” the statement said. It noted that food and fuel price-gains edged up in November, input costs are rising and risks to government revenue could stoke inflation, as could any global financial instability.

Key points from the statement:

  • Inflation forecast was raised to 4.3 percent to 4.7 percent for October-March from 4.2 percent to 4.6 percent.
  • Gross value added — key growth measure — was retained at 6.7 percent for the year through March 31
  • RBI said commercial lenders can improve transmission of previous policy rate cuts on outstanding loans

The main equity index was down 0.4 percent after the decision. The yield on the 10-year sovereign bond was up one basis point to 7.07 percent and the rupee traded 0.1 percent lower at 64.4175 a dollar. Higher interest rates had helped the currency offer some of Asia’s best returns this year to investors who borrowed in dollars.

‘Now Hawkish’

“Rising global oil prices will add inflationary pressure and increase India’s fiscal deficit,” Vik Mehrotra, chief executive officer of Boston-based Venus Capital, said in an email. “The bank has no room to cut rates and its general stance is now hawkish.‎”

Consumer prices rose at a seven-month high of 3.6 percent in October and a Bloomberg Economics index shows core inflation — which strips out volatile food and fuel — is stubbornly above the central bank’s 4 percent medium-term target. Vegetable and oil prices are surging and pay increases for government employees are raising housing costs.

Nevertheless, Modi’s advisers said India’s rates are too high. The central bank’s tendency to overestimate inflation has cost the economy, according to Ashima Goyal, a member of the Prime Minister’s Economic Advisory Council. The view is echoed by her colleague Surjit Bhalla.

Growth in gross domestic product picked up to 6.3 percent in July-September from a year earlier, halting a five-quarter deceleration but still lower than economists estimated. GVA increased 6.1 percent. India ceded its position as the world’s fastest growing major economy early this year and the pace of expansion has since stayed below China’s.

Monitoring Data

The RBI retained its neutral monetary stance, which means that “all possibilities are there on the table,” Governor Urjit Patel said at a briefing in Mumbai after the announcement. “We did not consider shifting the stance because nothing between October to now was significant enough in the macro outcomes to warrant that.” He said the RBI will continue to monitor incoming data.

Data due this month will show whether India’s current-account deficit has stabilized in July-September after ballooning to a 2013 high the previous quarter. Early next year India will probably publish revised growth numbers for the year ended March 2017 and then in February the government is expected to announce its budget.

“Monetary policy can help the economy only after the policy interventions initiated by the government to neutralize effects of demonetization and GST begin to show some results,” said Devendra Kumar Pant, chief economist at India Ratings Ltd. “Only once fiscal policy improves investments in the economy, can monetary policy changes by the RBI help.”
Source: Bloomberg