(Bloomberg) -- The Reserve Bank of India signaled it’s nowhere close to cutting interest rates yet as food-driven inflation remains a concern and Asia’s third-largest economy grows faster than expected.
The six-member Monetary Policy Committee voted unanimously to keep the benchmark repurchase rate at 6.5% for the fifth straight time, in line with economists forecasts. All but one of the panel members voted to keep the policy stance at “withdrawal of accommodation,” indicating rates may remain higher for longer.
While inflation has eased toward the 4% target, Governor Shaktikanta Das raised concerns about rising food prices, which makes up about half of the consumer basket, saying there are still risks of higher costs in coming months. With Prime Minister Narendra Modi facing an election next year, his government is taking concerted steps to curb prices of food like onions and rice.
“The inflation outlook will be influenced by uncertain food prices,” Das said in a live-streamed address from Mumbai. The inflation target of 4% is yet to be reached and “we have to stay the course,” he said.
Stocks advanced 0.3% on Friday, while the rupee traded flat at 83.3650 along with 10-year bond yields.
With India’s economy growing faster than any other major nation, policymakers aren’t ready to signal any easing yet. The RBI raised its growth projection for the fiscal year ending March to 7% from 6.5% — higher than most economists’ predictions.
The RBI’s new forecast is “conservative,” Deputy Governor Michael Patra told reporters Friday, pointing to high-frequency indicators in October and November that suggests growth remained strong this quarter. Das added that rural demand has rebounded, government capital spending has been strong and private investment is expected to pick up.
What Bloomberg Economics Says
The RBI “drove home its intention to stay the course on rates, saying its policy must continue to be “actively disinflationary” to ensure that inflation eases back to its medium-term target of 4%. We think the RBI will wait until after the Federal Reserve pivots before it starts cutting the repo rate, likely in April.”
— Abhishek Gupta, economist
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The RBI has raised its key interest rate by 2.5 percentage points since last year to help rein in inflation and bolster the rupee. Analysts are divided on when the central bank will cut interest rates, though most expect a shift only once the US Federal Reserve begins easing.
“We believe the RBI is firmly set on the course of policy pause for now,” said Aurodeep Nandi, economist at Nomura Holdings. “But we predict 100 basis points of cumulative policy easing starting from August 2024 as inflation moderates and growth headwinds gather.”
Das said in his speech that policymakers should be mindful of the risks of overtightening given global risks. He later clarified the comment to reporters, saying it shouldn’t be construed as rates have peaked.
“It would be wrong to think or assume that a change of approach or any loosening is round the corner. It’s not on the table,” Das said.
The governor repeated that the RBI’s focus is on the medium-term inflation target of 4%, and the central bank has “some distance to cover” to achieve that.
Das said the central bank will remain nimble on liquidity management and hasn’t yet seen the need to sell bonds in the open market, a move that would have sucked liquidity from the financial system and driven up market interest rates.
READ: Traders Breathe Sigh of Relief as RBI Tones Down on Bond Sales
“He doesn’t need to be hawkish anymore in his tone,” said Abhisek Bahinipati, a fixed-income trading head at Mirae Asset Capital Markets India. “The impact of all the factors taken together, surplus liquidity is unlikely to go up significantly.”
The governor said it will also allow banks to reverse transactions done through the central bank’s liquidity windows on holidays.
On potential foreign inflows, central bank officials said they have the capacity to manage the billions of dollars of investment expected around June once India’s bonds are included in JPMorgan & Co.’s emerging market bond index. Any concerns related to the inflows are “overblown,” Deputy Governor Rabi Sankar said.
--With assistance from Subhadip Sircar, Shwetha Sunil and Malavika Kaur Makol.
(Updates with governor’s comments from the briefing in the tenth paragraph.)
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