Rajan Leaves India Key Rate Unchanged as Inflation Eases
India’s central bank left its key interest rate unchanged as consumer-price inflation eased to a two-year low and the rupee strengthened, increasing scope to support growth ahead of national elections starting this month.
Governor Raghuram Rajan kept the repurchase rate at 8 percent, the Reserve Bank of India said in a statement today. Thirty-six of 39 analysts in a Bloomberg News survey predicted the move, while three saw a quarter-point raise. He has boosted the rate by 75 basis points since taking office in September.
Rajan’s move breaks with counterparts in Russia and Brazil, who increased rates as the withdrawal of U.S. stimulus and tensions over Ukraine threaten to trigger outflows. Further tightening isn’t anticipated if Indian consumer-price inflation remains on a path to hit 8 percent in January 2015 and 6 percent a year later, the central bank said today.
“The language, on balance, is hawkish,” said Leif Eskesen, chief economist for India and Southeast Asia at HSBC Holdings Plc in Singapore, who expects a quarter-point increase this year. “If they want to bring inflation down to that level, even assuming some progress on the supply side, they need to make monetary policy tighter than it is now.”
India’s consumer-price inflation remains the fastest among 18 Asia-Pacific countries tracked by Bloomberg even after easing in February to 8.1 percent, the slowest pace since January 2012.
The rupee has gained about 3 percent this year, the best performance in Asia after Indonesia’s rupiah, according to data compiled by Bloomberg. The S&P BSE Sensex (SENSEX) index of shares rose 5.3 percent in the same period, touching a record today, and the yield on the 10-year government bond fell two basis points to 8.80 percent.
There were no trades in India’s bond and currency markets today as banks close accounts for the fiscal year that ended yesterday. Stocks are trading today.
“I hope that the only thing that was surprising about monetary policy today was the lack of surprise,” said Rajan, who acted against market consensus in three of five meetings since he took office. “I’m glad financial markets and analysts have started understanding what we’re doing.”
The U.S. Fed last month further trimmed its bond-buying program by $10 billion to $55 billion as the world’s largest economy recovers, while Russia raised its main rate the most since 1998 as investors withdrew money on concern President Vladimir Putin will invade Ukraine. Brazil has raised rates by 75 basis points this year, most recently on Feb. 26.
Rajan said steps are being taken to allow foreign investors to protect themselves from market-price swings. Market regulators are finalizing terms allowing foreign investors to hedge currency risks by using exchange-traded futures and considering a proposal to permit them to hedge debt-coupon receipts due in the next 12 months, according to today’s RBI statement.
A sharper-than-expected drop in vegetable prices led to a “sizable fall” in headline inflation, while gains in prices of items excluding fuel and food remained flat, the Reserve Bank said. A weak monsoon, uncertainty over guaranteed agriculture prices and geopolitical developments are among risks to the central bank’s inflation forecast, it said.
“The Reserve Bank’s policy stance will be firmly focused on keeping the economy on a disinflationary glide path,” it said. Gross domestic product can grow between 5 percent and 6 percent in the fiscal year beginning today, it said.
Asia’s third-biggest economy grew 4.9 percent in the year ended yesterday, according to official forecasts, compared with a decade-low of 4.5 percent the previous year. An RBI survey today predicted it grew 4.7 percent last fiscal year and would expand 5.5 percent in the year starting today.
Indian Finance Minister Palaniappan Chidambaram last month said the central bank’s board mostly agreed that the objective of monetary policy should be both price stability and economic growth. A central bank panel had recommended making inflation “the predominant objective” of monetary policy and called for a 4 percent target with a band of plus or minus two percentage points by 2016.
Rajan said several of the panel’s recommendations had already been implemented, including the adoption of CPI as a policy anchor and “explicit recognition of the glide path for disinflation.” The RBI reduced the amount banks could borrow overnight while offsetting it with greater access to borrowing for seven and 14 days “to improve the transmission of policy impulses across the interest rate spectrum,” it said.
Subdued growth, rising vegetable prices and graft scandals have put the Congress party’s decade-long rule in jeopardy. The main opposition Bharatiya Janata Party will win the most seats in elections starting April 7 while falling short of a majority, opinion polls show. Results will be announced May 16.
Chidambaram defended the government’s record, saying his “biggest success” was containing the fiscal deficit at 4.6 percent of GDP in the financial year ended yesterday.
“The economy today is far more stable and far stronger than what it was 20 months ago,” Chidambaram told reporters in New Delhi yesterday. “Going forward, I can only see spirited growth in the economy.”
Economists from Barclays Plc and ICICI Bank Ltd. say the rupee could depreciate if the national polls don’t produce a clear winner. The currency has rebounded 15 percent from a record low in August, as the government curbed gold imports to narrow the current-account deficit and Rajan offered discounted swaps for dollars raised by banks.
If the polls don’t offer a clear mandate to either party, the rupee could drop to 68 per dollar from 59.8900 now, Societe Generale SA predicted on March 24.
“Markets right now are anticipating a stable government and rapid policy action,” Rajan said, adding that an unclear election outcome will impact the currency, stocks and bonds. “We have to be prepared for some turmoil.”
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