Rajan Holds India Rate in Surprise on Hazy Inflation Outlook
India’s central bank unexpectedly left the policy interest rate unchanged to support growth while saying it will act if Asia’s fastest consumer-price inflation fails to ease in the nation of 1.2 billion people.
Governor Raghuram Rajan kept the repurchase rate at 7.75 percent, the Reserve Bank of India said today, as only five of 31 analysts predicted in a Bloomberg News survey. The rest expected an increase to 8 percent. He had increased the rate by 50 basis points since taking charge of the RBI in September.
“We won’t react to every spike in inflation that is temporary,” Rajan told reporters in Mumbai after the decision. “It shouldn’t be taken that we are on hold. We are waiting for more data.”
Rajan’s effort to support expansion, which accelerated from a four-year low last quarter, risks exacerbating consumer inflation of more than 11 percent as the cost of everything from onions to clothing climbs. Prime Minister Manmohan Singh has struggled to revive investment while overseeing four straight quarters of economic growth below 5%, hurting his ruling Congress party’s popularity ahead of elections next year.
“The central bank can’t keep raising rates when growth is weak and inflation is driven by food prices,” said Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai, who predicted the decision. “Going forward, the rate action will depend on the price situation and the impact of the Fed taper on the rupee.”
The rupee declined 0.1 percent to 62.105 per dollar at the close in Mumbai and has depreciated about 11.5 percent this year. The S&P BSE Sensex index of shares climbed 1.2 percent. The yield on the 10-year government note maturing November 2023 slid to 8.79 percent from 8.91 percent yesterday.
Indications that vegetable prices may fall combined with a more stable exchange rate and lag effects from the previous rate increases give reason to hold the rate even though inflation is “too high,” the central bank said in a statement. The RBI will act, possibly on off-policy dates, if headline or core inflation does not ease in the next round of data releases, the RBI said.
“We are vigilant for the possibility that food inflation may be more entrenched,” Rajan told reporters. “We are not ignoring food inflation, but we would like to see through the noise. And for that, we want to wait for a month more.”
Risks to pausing include the possibility that the Federal Reserve will disrupt markets by tapering monetary policy, as well as perceptions that the RBI is soft on inflation, according to the statement, which called the move “a close one.”
Rajan’s decision comes ahead of a U.S. Federal Reserve announcement today on whether to start curtailing $85 billion in monthly bond purchases. Thirty-four percent of economists surveyed by Bloomberg Dec. 6 predicted the Fed will start reducing purchases this month, while 26 percent forecast January and 40 percent said March.
India is better prepared for the Fed to taper stimulus than earlier this year, Rajan said last week. The rupee plunged in August amid an exodus of funds from emerging markets on concern that the purchases would end.
India’s consumer prices rose 11.24 percent in November from a year earlier, the fastest among 17 Asia-Pacific economies tracked by Bloomberg. Wholesale inflation was 7.52 percent, a 14-month high. Gross domestic product grew 4.8 percent in the three months to Sept. 30.
“The RBI has done a smart balance between inflation targeting and incentivizing growth,” India’s Economic Affairs Secretary Arvind Mayaram said in an interview in Seoul today. That will help boost sentiment, he added.
Companies are facing cost pressures even as demand moderates. Hyundai Motor Co.’s Indian unit said yesterday it would raise prices across all models starting next month.
Rajan, 50, unexpectedly raised the repo rate by a quarter point in his first policy review on Sept. 20 and boosted it again by 25 basis points on Oct. 29. He’s lowered the marginal standing facility rate to 8.75 percent from 10.25 percent, the level reached when his predecessor boosted it 200 basis points on July 15 to curb the supply of rupees.
“We are very uncomfortable with the current level of inflation,” Rajan told reporters on Dec. 12. “Clearly growth is weaker than we would like, inflation is higher than we would like. It would be wonderful if we had the normal situation of extremely high growth and high inflation and extremely low growth and low inflation, in which case policy is very easy.”
Voters punished Singh’s party in recent state elections, with the main opposition Bharatiya Janata Party winning the most seats in four of five polls. Rajan last week called on political parties to ensure that the government that emerges after elections can pass measures necessary to support the economy.
The BJP is set to win the most seats in the national election due by May while falling short of an outright majority, according to a survey by C-voter polling agency, India TV and Times Now television published in October, the most recent available.
Rajan said today the government will have to cut some expenses to meet a deficit target of 4.8 percent of GDP. Tighter spending in the fourth quarter of the fiscal year ending March 31 add to concerns over economic growth, the central bank said in a statement.
India’s credit rating may be cut to junk next year unless the general election leads to a government capable of reviving economic expansion, Standard & Poor’s said last month.
Singh received a fillip yesterday for his effort to bolster investment when Tesco Plc, the U.K.’s largest supermarket company, said it plans to become the first global chain to enter India since the government allowed foreign companies to invest in multibrand retail more than a year ago. The company said it will probably invest about $110 million in a joint venture.
The narrowing of the trade deficit since June through November should bring down the current-account deficit to a more sustainable level for the year, the RBI said. Inflows into a swaps window opened by the RBI from August to November provided stability to the foreign-exchange market and helped build resilience to external shocks, the central bank said.
The rupee has climbed about 11 percent versus the dollar since reaching a record low in August after Rajan offered concessional swaps to banks to encourage them to raise dollars. The facility, now closed, attracted $34 billion.
India’s current-account deficit narrowed to $5.2 billion in July through September, the lowest level since 2010, compared with $21.8 billion for the prior quarter.
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