December 18, 2013 / 5:57 AM / 7 years ago

Expert Views: RBI surprises by holding interest rates steady

NEW DELHI (Reuters) - The Reserve Bank of India (RBI) unexpectedly kept the country’s policy interest rate on hold on Wednesday, despite calling current inflation too high, citing the prospect of easing retail prices and its concerns about the weak domestic economy.

A police officer stands guard in front of the Reserve Bank of India (RBI) head office in Mumbai April 17, 2012. REUTERS/Vivek Prakash/Files

The RBI had been widely expected to lift its repo rate by 25 basis points, but instead opted to keep the country’s main lending rate at 7.75 percent.

MUMBAI:

“The good part of today’s announcement is the central bank’s clarity on forthcoming monetary policy framework that would reduce the magnitude of market volatility in the coming days. The tone has clearly centred around reining the inflationary pressure arising due to excess demand.

“While the bank has left all the key policy rates unchanged, the possibility of a 25 basis points hike can’t be ruled out given that the core CPI is still at an unacceptable level.

“Looking at the bond yields, we see a stability at the current level with buying appetite given lower supplies in the coming months. We also expect the food article inflation to head down in the coming days both on retail and wholesale level.”

Read more on the RBI's rate decision, click here

DANIEL MARTIN, ASIA ECONOMIST, CAPITAL ECONOMICS

“Going forward, we expect rates to remain on hold for some time. Although the RBI has made it clear that it wants to bring down inflation, the economy is still yet to feel the effects of rate hikes implemented in earlier months.”

“With the domestic economy already weak, they should help keep demand-side price pressures in check. Moreover, some of the supply-side factors that have pushed up inflation in recent months could soon abate. Given that the economic recovery is still very fragile, we think the RBI will be patient with inflation.”

NITESH RANJAN, ECONOMIST, UNION BANK, MUMBAI:

“The status quo in policy rate is in line with our expectations, though RBI has surprised the market. Our belief for no change was built on what the governor has been articulating for a while. Weak growth, stable core CPI and WPI as well as incomplete pass-through of earlier actions have restricted the RBI from raising the rates.

“However, the governor has again provided clarity on next move which will depend upon retail and wholesale inflation numbers for December 2013. We believe that possibility of rate hike in January is high given core numbers do not seem to soften.”

YOGESH AGARWAL, MANAGING DIRECTOR, BILT

“While we understand that the RBI has to be primarily concerned with price stability and that fiscal policy also has to complement monetary policy in getting the economy back on track, a symbolic cut (in repo) would have helped.”

RAJEEV TALWAR, EXECUTIVE DIRECTOR, DLF LTD, DELHI

“I think this (the RBI decision to hold rates steady) is the first sign of recovery. Thank goodness the RBI governor has not panicked. Let us see till February. Hopefully, if food stocks are released in the market, food inflation comes down and that will be the end of the cycle.”

MANAGEMENT, MUMBAI

“A bit surprising given that they (the RBI) have been maintaining a hawkish stance and with the persistence of high inflation, markets were expecting a rate hike today, so no change in the repo rate comes as a surprise.”

“Given the headline inflation, we still expect another rate hike. They have indicated they will act in between if needed. Maybe they will watch the inflation situation and the(industrial) output data closely. They could also be waiting for the meeting of the U.S. Federal Reserve (later today).”

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

“The pause was surprising given the sharp rise in both retail and wholesale inflation. Clearly, the RBI expects a sharp fall in inflation during December-February. It is also probably getting unnerved by weak growth and will also wait for the Fed action later tonight. However, we do not see inflation fall significantly going ahead.”

PHANI SEKHAR, FUND MANAGER, ANGEL BROKING, MUMBAI

“It is a calibrated policy based on the assumption that inflation in November was a one off. It also has a caveat that the RBI can act outside the policy too. A lot now depends on the next data reading or other evidence on inflation.

“Equities would react positively for the next few days. Markets are forward looking and would even try to extrapolate this into an end of rate hike cycle for the short term.”

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

“It is completely unexpected given the liquidity in the system as well as the inflation trajectory. I think it is just postponement of action, because the policy clearly says they (the RBI) may take action any time, even in the interim between two policies, if the situation warrants.

“They are saying this because they are waiting for food inflation to ease, because these spikes, according to them, were caused by temporary imbalances.

“We should be prepared for acute tightness going forward, given the kind of abnormal inflationary pressures the country is facing and I expect these pressures to continue. I feel there will not be any alternative but to reassert monetary tightening, which the next data point would guide.”

DARIUSZ KOWALCZYK, SENIOR ECONOMIST EX-JAPAN ASIA, CREDIT

AGRICOLE CIB, HONG KONG

“The RBI governor Rajan is losing credibility after his tough language expressing strong disappointment with high inflation last week. We expect INR to fall, but equities and bonds to rise.”

LINKS

GRAPHIC: India CPI and WPI link.reuters.com/zar28t

Online link: here

MARKET REACTION

The benchmark 10-year bond yield fell as much as 15 basis points on the day to 8.76 percent after the policy review.

The partially convertible rupee was trading at 61.81/82 per dollar versus its previous close of 62.01/02.

The benchmark BSE Sensex was up 1.1 percent, while the Nifty rose 1.2 percent.

BACKGROUND

- Wholesale price index (WPI) climbed 7.52 percent in November from a year earlier, its quickest pace since September 2012, compared with 7 percent in October, data showed on Monday.

- Data showed last week October’s industrial production output shrank 1.8 percent year-on-year, dampening sentiments after recent gross domestic product data had suggested the economy may have bottomed out.

- India’s economy grew a higher-than-expected 4.8 percent in the three months through September, helped by an uptick in agriculture and construction, government data showed last month.

Reporting by Mumbai Treasury Desk; editing by Malini Menon

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