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RBI keeps key interest rate unchanged, cuts inflation projections
June 8, 2017 / 5:11 AM / 6 months ago

RBI keeps key interest rate unchanged, cuts inflation projections

MUMBAI (Reuters) - The Reserve Bank of India (RBI) lowered inflation projections and delivered a slightly less hawkish policy statement on Wednesday, as it left key interest rates unchanged while waiting to be more sure that inflation will stay subdued.

A man checks his phone outside the Reserve Bank of India (RBI) headquarters in Mumbai, India June 7, 2017. REUTERS/Shailesh Andrade

The change in tone was enough for some analysts to see a possibility of an interest rate reduction by the Reserve Bank of India (RBI) later this year.

But others thought the RBI’s caution made it unlikely, expressing disappointment it had not shown more willingness to ease rates. A government adviser argued strongly for rate cuts, saying the economy, which is growing more slowly than expected, needed them.

The monetary policy committee on Wednesday left the policy repo rate at 6.25 percent - a 6-1/2 year low - and the less watched reverse repo rate at 6.0 percent - as widely expected.

But in a concession to the need to revive private investment, the RBI made it easier for India’s stressed banks to lend, cutting their statutory liquidity ratio - the amount of bonds they must set aside - by 50 basis points to 20 percent of total deposits from June 24.

Maintaining a “neutral” policy stance, the RBI said it wanted more evidence that the price trend seen in April, when inflation dropped to a more-than-five-year low of 2.99 percent would endure.

“Last month’s headline inflation print and revised growth estimates have certainly raised difficult policy questions,” Viral Acharya, the deputy governor in charge of monetary policy, told a news conference.

“We will watch carefully next few months the incoming data on inflation as well as the indicators of real economic activity.”

Among the reasons for the bank’s caution were sticky core inflation, and higher government spending if Prime Minister Narendra Modi heeds farmers’ calls to forgive their debts.

“Premature action at this stage risks disruptive policy reversals later and the loss of credibility,” the RBI said. “Accordingly, the MPC decided to keep the policy rate unchanged with a neutral stance and remain watchful of incoming data.”

As expected, the RBI cut its projection for consumer price inflation to 2.0 percent to 3.5 percent in April to September, down from 4.5 percent earlier, and to 3.5 percent to 4.5 percent in October to March, down from 5 percent earlier.

People walk past a barricade inside the Reserve Bank of India (RBI) headquarters in Mumbai, India June 7, 2017. REUTERS/Shailesh Andrade

RBI has a medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus or minus 2 per cent, “while keeping in mind the objective of growth”.

The RBI said the risks to inflation were “evenly balanced,” a tweak in language from its April statement, when it cited “upside risks”.

Weather forecasters predict a normal monsoon, which should reduce one upside risk, and other positive factors include falling commodity prices, and a rally of 5 percent in the rupee that has made imports cheaper.

Slideshow (2 Images)

The less hawkish statement, and hopes that inflation will stay low, helped the Indian bond market advance, sending the benchmark 10-year bond yield down by as much as 10 basis points to its lowest since April 6. The Nifty, however, rose 0.3 percent.

PRESSURE TO CUT RATES

Only one of the six MPC members voted against leaving interest rates unchanged, the first split in the five meetings since the panel was formed last September. The statement did not say how the dissenting member, Ravindra H. Dholakia, voted.

The RBI last changed the policy rate with a cut of 25 basis points in October.

Lower inflation had raised pressure on the RBI to cut rates after India’s economy grew a slower-than-expected 6.1 percent in the January-March quarter, its slowest pace in more than two years and down from 7 percent in the previous quarter.

The slowdown was largely attributable to the government’s shock decision last November to remove large denomination banknotes from circulation.

The RBI adjusted its projection for growth value-added, a measure of economic growth it prefers, to 7.3 percent in the year to March 2018, down from its previous projection of 7.4 percent, with “risks evenly balanced”.

India’s chief economic adviser, Arvind Subramanian, strongly argued for rate cuts, telling reporters after the RBI decision that “seldom have economic conditions and outlook” made so clear the need for “substantial monetary policy easing”.

Additional reporting by Devidutta Tripathy, Abhirup Roy, Arnab Paul, Tanvi Mehta, Krishna V Kurup, and Jessica Kuruthukulangara; Writing by Rafael Nam; Editing by Simon Cameron-Moore and Clarence Fernandez

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