India’s central bank left its benchmark interest rate unchanged, while taking steps to boost liquidity in the banking system and stem a decline in the rupee.
The Reserve Bank of India’s (RBI) monetary policy committee voted four-to-two to keep the repurchase rate at 6.5 percent, in line with the forecasts. The cash reserve ratio (CRR) — the proportion of deposits that banks must set aside with the RBI — was lowered by 50 basis points to 4 percent, to address a potential cash squeeze.
“At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation,” RBI Governor Shaktikanta Das said in a livestreamed address in Mumbai.
Photo: AFP
A “status quo” is “appropriate and essential,” though if growth slowdown lingers beyond a point, “it may need policy support,” he said.
Bonds fell after the RBI’s rate hold, while stocks reversed losses after the CRR cut. The rupee gained against the US dollar as the central bank announced measures to attract foreign inflows by allowing banks to offer higher interest rates to non-resident Indians.
India’s inflation has remained well above the RBI’s 4 percent target aim, with price gains accelerating to a 14-month high of 6.21 percent in October. Das had previously stated a rate cut at this stage would be “very risky.”
“Our effort has always been to remain in line with the curve and never fall behind it,” the governor said at the post-policy press briefing yesterday.
Volatility in food costs, which make up about half of the inflation basket, would likely keep price gains elevated in the October-to-December period, Das said.
The central bank raised its inflation forecast for the year through March next year to 4.8 percent from 4.5 percent earlier, while lowering its growth forecast to 6.6 percent from 7.2.
Calls for easing are growing after a sharper-than-anticipated dip in the July-to-September period economic growth to 5.4 percent. External members of the monetary policy committee, Nagesh Kumar and Ram Singh, voted for a quarter-point reduction. Prominent ministers in Indian Prime Minister Narendra Modi’s government, including the finance minister, have called for lower borrowing costs in recent months.
“The policy decision continues to prioritize inflation control over growth rescue,” said Aurodeep Nandi, an economist at Nomura Holdings Inc.
“However, there are indications that the policy paradigm could be shifting, which reflects in additional dissent within the [monetary policy committee] and Das’ commentary that the growth outlook warrants monitoring,” he added.
“The central bank’s insistence on keeping rates steady, partly stemming from its overly optimistic growth assessment, is likely to inflict more damage on the economy. We now expect the RBI to deliver a 50-basis-point rate cut in February,” said Abhishek Gupta, an economist for Bloomberg Economics in Mumbai.
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