Rajan Holds India Rates in Final Move as Inflation Quickensby
The decision was predicted by 27 of 29 economists in survey
Rajan plans to leave the central bank when term ends Sept. 4
India’s central bank Governor Raghuram Rajan left interest rates unchanged at his last policy review as food prices threaten to push inflation above the nation’s target.
The benchmark repurchase rate will stay at a five-year low of 6.50 percent, the Reserve Bank of India said in a statement in Mumbai on Tuesday. The move was predicted by 27 of 29 economists in a Bloomberg survey, with two expecting a cut to 6.25 percent.
“Risks to the inflation target of 5 percent for March 2017 continue to be on the upside," the statement read. “It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action.”
Since surprising India by announcing a return to academia when his term ends on Sept. 4, Rajan has urged his yet-to-be-named successor to continue the fight against one of Asia’s highest inflation rates. The next governor will need to assess whether the revival of the monsoon has created room for India to follow nations like Malaysia and Australia in monetary easing as risks to the global economy mount.
“From the current governor’s perspective, with an upward risk to inflation target of 5 percent, there is no rate cut," said Indranil Pan, chief economist with IDFC Ltd. "A lot will depend on the new governor."
Key points from the statement:
- The stance of monetary policy remains accommodative and will continue to emphasize the adequate provision of liquidity
- Growth momentum to pick up by normal monsoon and government pay increase
- Authorities to continue intervening in money and currency markets to enable foreign-exchange swap redemptions without market disruption
- Pro-active liquidity management will help banks transmit more of the previous rate cuts to borrowers
Indian bonds advanced after the decision. The yield on sovereign notes due January 2026 dropped four basis points, the most since July 28, to 7.13 percent as of 11:16 a.m. in Mumbai. The rupee fell 0.1 percent to 66.88 per dollar, according to prices from local banks compiled by Bloomberg.
In a press briefing immediately afterward, Rajan said he hoped a proposed monetary policy committee would be in place to make the next decision on interest rates.
"This is my last statement, but there are still 28 days in my term, which I intend to use fully,” he told reporters.
In the coming weeks, the monetary authority -- which is also India’s banking regulator -- will issue guidelines on peer-to-peer lending and also new rules for corporate bond markets.
Although consumer inflation touched a 22-month high in June, reports of above-average rains in the annual June-September monsoon may provide some relief -- particularly after the first back-to-back droughts in almost three decades.
At the same time, higher pay for civil servants and a planned national sales tax threaten India’s inflation goals of 5 percent in March 2017 and 4 percent a year later, plus or minus two percent. Rajan said on Tuesday that it would be “premature" to talk about the inflationary impact of the goods-and-services tax, or GST.
“If the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may continue to trend upwards and counterbalance the benefits of the expected easing of food inflation,” the RBI said.
Prime Minister Narendra Modi’s government last week cemented Rajan’s inflation target in law through 2021. A rate setting panel will soon follow, completing the biggest overhaul of the 81-year-old central bank.
Modi has less than four weeks to pick a successor for Rajan, who announced his exit almost two months ago following criticism of his policy decisions by a key ally of the prime minister.
During his three years in office, Rajan has boosted foreign-exchange reserves to a record, stabilized the rupee and pressured banks to begin cleaning up $120 billion of souring loans.