Reserve Bank leaves rates unchanged; inflation risks weigh as rupee sags

MUMBAI Mon Jun 17, 2013 3:49pm IST

Two men make phone calls while standing near a Reserve Bank of India (RBI) crest at the RBI headquarters in Mumbai January 29, 2013. REUTERS/Vivek Prakash/Files

Two men make phone calls while standing near a Reserve Bank of India (RBI) crest at the RBI headquarters in Mumbai January 29, 2013.

Credit: Reuters/Vivek Prakash/Files

Priyanka Gandhi Vadra, daughter of Congress party chief Sonia Gandhi, adjusts her flower garlands as she campaigns for her mother during an election meeting at Rae Bareli in Uttar Pradesh April 22, 2014. REUTERS/Pawan Kumar

Election 2014

More than 814 million people — a number larger than the population of Europe — are eligible to vote in the world’s biggest democratic exercise.  Full Coverage 

MUMBAI (Reuters) - The Reserve Bank of India kept interest rates unchanged on Monday as expected after cutting them in each of its previous three policy reviews, warning of upward risks to inflation as the rupee is among the hardest hit amid a global emerging markets sell-off.

The rupee touched an all-time low of 58.98 to the dollar last week as investors worried about India's record-high current account deficit and were unimpressed by government efforts to boost investment.

The RBI said food prices and the falling currency pose inflationary risks, and also called for vigilance over global economic uncertainty, citing the risks of a reversal of capital flows like the one that has roiled emerging markets in recent weeks.

Last week, Indonesia responded to outflows and market volatility by unexpectedly raising interest rates - the first Asian central bank to do so since 2011 - in a bid to support its currency, while Brazil said it would scrap a tax on foreign exchange derivatives as the real weakened.

Other major developing countries with large foreign financing needs such as South Africa and Poland are also seen at risk.

"The RBI was slightly hawkish but with the rupee under pressure to weaken, the tone was appropriate," said Suresh Kumar Ramanathan, head of regional interest rates and FX strategy at CIMB in Kuala Lumpur.

The current account deficit hit 5.4 percent of GDP in the April-December period, exacerbating pressure on the rupee.

"As long the rupee is under pressure, RBI will hesitate to ease anytime soon," Ramanathan said.

The Indian central bank left its policy repo rate unchanged at 7.25 percent and kept the cash reserve ratio (CRR), or the share of deposits banks must keep with the central bank, steady at 4.00 percent, despite some signs of moderating inflation in recent months.

"It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth," the RBI said in a statement.

Indian markets were little affected by the policy decision. The 10-year bond yield briefly fell, while the Sensex extended losses to trade down 0.4 percent. The rupee was trading largely unchanged from pre-statement levels, at around 57.80/81 per dollar, but still down more than 4 percent for the year to date.

Still, economists said there remains room for moderate policy easing in coming months.

"What the RBI is looking at is not just a couple of months of improving inflation but something that is much more lasting," said Rajeev Malik, senior economist at CLSA in Singapore, who expected a rate cut in the July policy review but none thereafter in the near term.

Inflation, repo rates, output, link.reuters.com/deq95s

For a graphic on BOP vs current account balance, click link.reuters.com/hyj47s

India GDP, exports: link.reuters.com/qaw46s

Asian interest rates link.reuters.com/wyd26s

Graphic on Asian currencies link.reuters.com/qet78t

PRICE PRESSURES LOOM

A Reuters poll released on Thursday showed 28 of 38 analysts expected the RBI to hold the repo rate steady and 30 of 34 saw the CRR unchanged.

The RBI left rates on hold despite headline wholesale price index inflation that fell to 4.7 percent in May, within its comfort zone, and further signs of economic weakness.

The economy expanded by just 5 percent in the fiscal year that ended in March, its weakest in a decade.

Trade deficit in May widened to $20.1 billion from $17.8 billion a month ago, a trade ministry official said on Monday, amid high imports of cheaper gold, increasing pressure on the current account balance.

Imports rose about 7 percent from a year earlier, while exports fell 1.1 percent, the first annual fall in five months.

While noting that inflation had eased, the central bank warned of looming price pressures.

"Upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects," the RBI said.

(Editing by Kim Coghill)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Election 2014

Election 2014

Kashmiris wary as Modi challenges for power.  Full Article 

Facebook's Performance

Facebook's Performance

Facebook Q1 revenue grows 72 percent on rising mobile ads.  Full Article 

Earnings Season

Earnings Season

Bharti Infratel Q4 net profit jumps 64 percent.  Full Article 

Monsoon Forecast

Monsoon Forecast

South Asia monsoon seen below-average to average in 2014 - WMO.  Full Article 

Solar Dispute

Solar Dispute

Green groups urge U.S. to drop solar trade case against India.  Full Article 

Oil Imports

Oil Imports

India to make May-July oil payments to Iran - sources.  Full Article 

Rice Exports

Rice Exports

India may cede top rice exporter spot under Southeast Asian price onslaught.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage