RBI Holds Rates; Signals Tight Policy On Inflation Concerns

(CTN News) – As widely expected, the Reserve Bank of India (RBI) held its key lending rate steady on Friday, signaling it would keep rates high and liquidity tight to keep inflation at 4%.

The benchmark bond yield in India rose the most in 14 months following the central bank’s tough stance on inflation and its surprise announcement of bond sales to absorb excess funds.

A unanimous decision was made by the country’s monetary policy committee (MPC) to maintain the repo rate (INREPO=ECI) at 6.50%. According to Reuters, most economists expected it to maintain rates.

In an effort to cool surging prices, it raised rates by 250 basis points (bps) since May 2022.

“At the current juncture, monetary policy needs to remain actively disinflationary,” RBI Governor Shaktikanta Das said.

As part of its policy to ensure inflation gradually aligns with the committee’s target while maintaining economic growth support,

The RBI also maintained its “withdrawal of accommodation” stance.

A neutral policy stance can only be considered when inflation is aligned with the target on a “durable” basis, Das said. The stance was approved by five of the six committee members.

According to Das, the economy is still feeling the effects of past rate hikes.

Retail inflation eased to 6.83% in August from a 15-month high of 7.44% in July, but remained well above the central bank’s 2%-6% comfort zone. A core inflation rate of under 5%, excluding food and oil, was reported, however.

As erratic weather affects production of staples like vegetables, milk, and cereals, food prices have spiked sharply.

“While core inflation continues to decline, the overall inflation outlook remains cloudy due to patchy rains and volatile global food and energy prices,” Das said.

Based on the central bank’s forecast, inflation is expected to average 5.4% in the financial year 2023-24. As a result, the government kept its economic growth projection for the year at 6.5%, despite signs of a slowdown in global demand.

According to Suvodeep Rakshit, senior economist at Kotak Institutional Equities in Mumbai, growth remains resilient and core inflation remains low.

“We continue to favor a prolonged pause on repo rates at 6.5% well into fiscal year 2024/25, while aiming for near-neutral liquidity over the medium term.”

According to a separate report published alongside the monetary policy review, the central bank expects inflation to reach its 4% target only by the second quarter of next financial year.

Inflation is targeted at 4% and not 2-6%, Das stressed. Our goal is to align inflation with the target while supporting growth at the same time.

Due to high inflation, the RBI is less able to hike rates without hurting growth due to a reduced ability to raise them.

Das said the central bank may consider open market sales of bonds via auctions to manage liquidity conditions in line with its inflation objectives, but that no timeframe has been set for such sales.

Liquidity in the Indian banking system has been in deficit, but government spending has not yet picked up.

Following Das’ statement that the RBI could consider open market sales of bonds, 10-year benchmark bond yields rose to their highest level in six months. Following the policy announcement, the yield on the benchmark 2033 bond jumped to 7.3412%, up from 7.2197% beforehand.

Local shares also remained higher with the benchmark BSE index (.BSESN) up 0.40% following the decision, while the Indian rupee weakened marginally to 83.2350 to the U.S. dollar.

An analyst poll by Reuters showed that analysts expect the RBI to keep the repo rate at 6.5% for the remainder of this fiscal year, with a 25 bps cut before July as the next move.

According to Capital Economics, Das’ comments about price risks on Friday suggest there is a significant risk that any loosening of monetary policy would be delayed until mid-next year.

In comparison with other emerging market central banks, that would be a long time to wait.”

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