Mumbai
India kept interest rates unchanged as expected, as the central bank shrugged off slowing growth and vowed to continue to assess whether a drop in inflation to a record low in the $2 trillion (Dh7.34 trillion) economy was transitory.
The Reserve Bank of India, led by Urjit Patel, kept its benchmark repurchase rate at 6.25 per cent while reducing its inflation forecasts, according to a statement in Mumbai on Wednesday. The move was predicted by all but two of the 50 economists in a Bloomberg survey who expected a cut to 6 per cent.
“The easing of inflation excluding food and fuel may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand,” the bank said in a statement released on its website.
Prime Minister Narendra Modi’s ban on high-denomination bank notes in November — aimed at stamping out corruption — has dragged on activity. Gross domestic product expanded by 6.1 per cent in the January to March quarter, the slowest in two years, and India ceded its crown as the fastest growing major economy to China during the period.
Key points from the statement:
Still, analysts expect growth to pick up in the rest of the year. A normal monsoon is poised to boost rural incomes while increased government spending, and higher allowances for workers in the public sector, may bolster consumption and activity.
Activity in the services sector jumped in May, according to the latest purchasing managers’ index while industrial output rose 2.7 per cent in March from a year earlier.
The move marks a return to stability for the central bank after policy surprises earlier this year. The RBI unexpectedly changed its stance from accommodative to neutral in February, signalling an end to its two-year rate easing cycle. In April, it surprised investors again by raising the reverse repo rate as it sought to absorb some of the excess cash sloshing in the banking system from the cash ban. Surplus liquidity still stands at about $60 billion.
While headline inflation dropped to a record low 2.99 per cent in April, core inflation, which strips out volatile food and fuel costs — was at 4.5 per cent, according to ICICI Bank Ltd. The RBI aims to keep inflation near 4 per cent in the medium term.
Governor Patel said in April that although headline inflation may have undershot its target in fiscal fourth quarter ended in March, the outlook called for “close vigilance” on prices.
The RBI’s move also comes just days before the Federal Reserve is expected to raise rates with expectations growing that it may start to shrink its balance sheet later this year, a move that may slow capital flows into emerging markets. The introduction of India’s national goods and services tax, scheduled for July 1, could also cause short-term disruption.
