India RBI Keeps Benchmark Rate Unchanged at 6.75%

  • Will use space for more accommodation when available: Rajan
  • RBI to unveil marginal cost pricing for banks this week

India’s central bank left interest rates unchanged after four cuts this year to meet inflation targets that are starting to look more vulnerable.

Governor Raghuram Rajan kept the benchmark repurchase rate at 6.75 percent, the Reserve Bank of India said in a statement in Mumbai on Tuesday. The move was predicted by all 47 economists in a Bloomberg survey.

“The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 percent by March 2017,” Rajan said.

Rajan, who took advantage of a commodity slump to slash one of Asia’s highest borrowing costs, now has to contend with rising food prices that are fanning inflationary pressures. An anticipated increase in U.S. interest rates this month also risks triggering capital outflows.

"There are three events which the RBI will wait for before moving," said Sujan Hajra, a Mumbai-based economist at Anand Rathi Financial Services Ltd. "The monetary policy stance of the Fed, what’s happening to the budget and the impact of the pay commission on inflation. Pending this, we don’t expect RBI to do anything in the next two-three months."

Consumer-price gains accelerated to 5 percent in October led by a surge in food items such as lentils, matching Rajan’s target for March 2017. Such spikes have contributed to pushing up inflation expectations, a key obstacle in the fight to bring the gauge toward 4 percent a year later.

India’s rupee and stocks pared gains. The currency weakened to 66.5275 a dollar as of 11:45 a.m. in Mumbai from 66.4350 before the decision and the S&P BSE Sensex Index was 0.2 percent higher. The yield on the benchmark 10-year note was at 7.75 percent.

Food, Oil

The central bank will pay close attention to food and oil prices while tracking inflationary expectations and external developments, Rajan said. Inflation is expected to accelerate until December before plateauing, he said, adding that government measures are needed to maintain food supplies if crops suffer due to poor rainfall.

“The uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance,” Rajan said, noting that oil prices are expected to remain benign for several quarters barring any geopolitical shocks. He expected inflation to follow the central bank’s projected path “with risks slightly to the downside.”

Rajan said he’ll also be monitoring the implementation of a proposed pay raise for civil servants that risks stoking prices. Even so, he said, “its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the government stays on the fiscal consolidation path.”

Lending Rates

Rajan again emphasized the need for banks to transmit 125 basis points of cuts so far this year, saying less than half had been passed on to consumers. To improve transmission, the central bank plans to change the way banks determine base rates -- rules of which he said will be shared this week -- while the government also examines linking rates on small-savings schemes to market interest rates.

"As they move toward marginal cost and eventually a market benchmark, both of which will be enabled, they will have to pay more attention to asset liability management," Rajan told reporters at a briefing. "Ultimately we’ll have a market-based measure which will be more sound, more credible."

Bright Spot

India, a commodities importer, is a bright spot among the world’s biggest emerging markets. Its economy grew 7.4 percent in the three months through September -- topping estimates -- and is set to outpace a slowing China this year as Prime Minister Narendra Modi boosts infrastructure spending.

Even so, Modi has struggled to pass key economic bills including a national sales tax through parliament, prompting investors to lose patience with the pace of reform. India’s stocks and currency are among Asia’s worst-performing over the past month.

Exports have fallen for 11 straight months and credit growth is hovering near a 20-year low.

“Growth recovery is still on a wobbly footing and could do with some responsible policy support,” economists at HSBC Holdings Plc led by Pranjul Bhandari wrote in a Nov. 26 report. They estimate that only 50 percent of the economy is improving.

While swaps had signaled the possibility of a rate cut next year, economists surveyed in November didn’t expect any changes through 2016. Separate Bloomberg surveys show India expanding 7.4 percent in the fiscal year through March 2016 compared with China’s 6.9 percent pace in 2015.

Rajan left the central bank’s growth forecasts unchanged “with a mild downside bias.”

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