India’s RBI keeps rates on hold, maintains easy stance

Mumbai: India’s central bank kept interest rates on hold at 7.50 per cent on Tuesday, choosing to wait longer to assess inflationary pressures before making its next move, and to give banks more time to adjust lending rates to reflect previous rate cuts.

The Reserve Bank of India said in a statement after its policy review that it would maintain an “accommodative stance”, but also cited risks, raising some uncertainty about when the central bank would cut interest rates next.

Governor Raghuram Rajan did not expect RBI policy to be blown off course by the prospect of the Federal Reserve raising US rates. Whereas higher US interest rates are expected to lead to capital outflows from some emerging market economies, the Indian rupee has remained firm against other currencies thanks to strong inflows.

“At this point ... we feel we are adequately buffered. That is not going to be the key factor in determining our monetary policy stance going forward,” Rajan said.

The RBI embarked on an easing cycle in January to bolster economic growth. So far it has cut rates twice this year, by a total 50 basis points. Both times the reductions took place outside of the regular policy reviews.

Rajan voiced impatience that only a few banks lowered lending rates after the earlier RBI cuts, raising concerns over the transmission of monetary policy to the broader economy. He dismissed bankers claims that the cost of funds remained too high.

“Banks are sitting on money,” Rajan said. “Their marginal cost of funds has fallen. The notion that it hasn’t fallen is nonsense.” EYE ON THE WEATHER Most of the 40 economists surveyed by Reuters had expected RBI to keep the key lending repo rate unchanged this time, expecting instead the RBI to lower it one more time by the end of June. The next policy review is on June 2.

Whether consumer inflation stays within its target of 2 to 6 per cent will be crucial to prospects for future rate cuts, though the RBI has also said it needs Prime Minister Narendra Modi’s government to control its fiscal deficit and push economic reforms.

The consumer price index rose 5.37 per cent in February, the fifth consecutive month that it has stayed within the RBI’s target range. March data is due on April 13.

The RBI projected CPI would stay at current levels in the April-June quarter, and fall to around 4 per cent by August, only to then rise to 5.8 pct by the end of the year.

As ever in India, much depends on the impact of the weather on food prices. Heavy rainfall last month pushed up prices for winter crops such as wheat and pulses.

The RBI will also be wary of the potential for tensions in the Middle East to force oil prices higher.

The focus on inflation reflects the RBI’s more targeted approach under Rajan.

RBI on Tuesday reiterated its target of 6 per cent CPI by January 2016 and set a new target of 4 per cent by the end of 2017/18, the midpoint of the CPI range.

The RBI projected economic growth of 7.8 per cent in the 2015/16 fiscal year, using the new methodology adopted by the government earlier this year that has raised scepticism among analysts. The central bank’s forecast is less optimistic than the government’s prediction of 8.0 to 8.5 per cent growth.

If inflation were to remain relatively benign, the RBI’s monetary policy could be more supportive for economic growth.

“For the rest of the year, one can expect 25-50 bps cut, but timing of the same is a tough call,” said R. Sivakumar, head of fixed income for Axis Asset Management.