Photographer: Adeel Halim/Bloomberg

India Holds Rates at Seven-Year Low to Spur Flagging Growth

  • Key rate kept at 6% as seen by 31 of 32 economists in survey
  • FY18 growth forecast cut, inflation projected to accelerate

India held interest rates at the lowest level since 2010, as it looks to spur growth without stoking inflation.

The benchmark repurchase rate was kept at 6 percent, the Reserve Bank of India said in a statement in Mumbai Wednesday, as predicted by 31 of 32 economists in a Bloomberg survey. One had expected a cut to 5.75 percent.

Five on the RBI’s six-member monetary policy committee voted for no change in the key rate as the central bank raised its inflation forecast and lowered the growth estimate. The panel reiterated that it is "imperative to reinvigorate investment activity" and said it stays committed to keeping inflation close to 4 percent.

"Although the domestic food price outlook remains largely stable, generalized momentum is building in prices of items excluding food, especially emanating from crude oil," the central bank said. "The possibility of fiscal slippages may add to this momentum in the future."

Indian sovereign bonds fell with the yield on the benchmark note due 2027 rising five basis points to 6.70 percent as of 3:14 p.m. in Mumbai. The rupee held on to its gains, trading at 65.25 a dollar. Both S&P BSE Sensex and the NSE Nifty 50 Index were up 0.5 percent.

"The Reserve Bank of India’s decision to keep policy unchanged puts it further behind the rates curve," said Abhishek Gupta, an economist at Bloomberg Intelligence. "By keeping real interest rates high even as growth slows sharply and bad loans snowball, the central bank is damping sentiment and imposing a stiff headwind on the economic recovery."

Read: India’s Markets Could Choke on This Desperate Medicine

Key points from the statement:

  • Inflation during October-March forecast 4.2 percent to 4.6 percent, faster than previous 3.5 percent to 4.5 percent projection
  • Forecast for gross value added -- a key measure of growth -- cut to 6.7 percent for the year through March 2018 from 7.3 percent
  • RBI lowered the proportion of deposits banks need to invest in specified securities, such as government bonds, to 19.5 percent from 20 percent effective Oct. 14

The central bank’s decision may add pressure on the government to boost investment, though it has limited room to spend. Slowing economic activity has hit India’s revenues, even while rebounding global oil costs have stoked inflation. Late on Tuesday, the government cut a domestic levy on gasoline and diesel that Nomura Holdings Inc. estimates will lower inflation directly by 8-9 basis points while the administration will lose 260 billion rupees ($4 billion) each year.

Gross domestic product in the $2 trillion economy will expand 6.8 percent in the year through March, the slowest pace in four years, according to the median estimate in a Bloomberg survey published late last month. The forecast was lowered from 7.3 percent predicted in August as Prime Minister Narendra Modi’s abrupt decision to ban high-value bills and uncertainty stemming from the introduction of the goods and services tax disrupted business.

Markets Concerned

The slowdown threatens to erode investor appetite for Indian assets, which has already been dented by a tightening Federal Reserve. The rupee and main stock index are among the world’s worst performers since the end of August and benchmark 10-year bonds have posted back-to-back monthly losses for the first time since 2015.

Banks are also not lending due to a rise in bad loans while over-leveraged companies are staying away from borrowing more. The rate-setting panel said there may be a wider gap between India’s potential and actual growth, but more data is needed to reach an conclusion.

"The tone of the statement is more hawkish and there should be some moderate pressure on bonds in the short term," said Sanjay Mathur, chief economist for Southeast Asia and India at Australia & New Zealand Banking Group Ltd. in Singapore. "However, the RBI also alluded to the fact that whether the growth slowdown is temporary or long lasting can only be ascertained later. This suggests that the door for easing further out is not fully closed."

— With assistance by Manish Modi, Nupur Acharya, Cynthia Li, Ameya Karve, Subhadip Sircar, and Ruth Pollard

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