MUMBAI: India’s central bank kept its policy rate on hold at 6.75%, as widely expected, opting to wait until after the government’s annual budget statement at end-February to decide on whether to cut interest rates further.
Having cut the policy repo rate by 125 basis points in 2015, Reserve Bank of India governor Raghuram Rajan warned last Friday against straying from the path of fiscal consolidation or relaxing the fight against inflation.
Rajan, in his statement yesterday, said the central bank would stay “accommodative” but would look forward to the government’s budget on Feb 29, saying it needed to be one that supports growth and controls spending.
How the government implements a planned 24% pay hike in salaries and pensions for some 10 million current and former government employees will also be key in determining the path of inflation, he noted.
“The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation,” Rajan said in his statement.
“Structural reforms in the forthcoming Union Budget that boost growth while con trolling spending will create more space for monetary policy to support growth.”
Rajan also reiterated the central bank would ensure it is injecting sufficient liquidity into the banking system including conducting more open market operation bond purchases.
Banks have blamed the lack of cash in the financial system for their inability to match the RBI rate cuts last year, with most banks having lowered lending rates by only about 60 bps.
The 10-year bond yield rose around five basis points to 7.83% from levels before the decision, but the rupee and the NSE share index were broadly range-bound.
If the fiscal deficit is kept within reason, then inflation trends over coming months could also favour hopes for lower interest rates.
The RBI will have to keep watch over developments in global markets that began this year in a jumpy state.
Other major central banks, notably the Bank of Japan and Bank Indonesia have eased monetary policy, and the European Central Bank is expected to ease too, though the US Federal
Reserve is expected to raise rates later this year. Oil prices near 13-year lows and seasonally subdued food pris should help bring inflation down to the RBI’s target of 5% by March 2017, after it hit a 15-month high of 5.61% in December.
Only 37 out 39 economists polled by Reuters had expected the
RBI to leave the policy repo rate unchanged for now. – Reuters