RBI keeps rates on hold despite rising inflation

December 19, 2013 - 7:22:40 am

Indian construction workers carry a sheet of glass at a construction site in Mumbai yesterday. Reserve Bank of India kept a key interest rate unchanged yesterday.

MUMBAI: India’s hawkish central bank surprised markets by keeping its key interest rate unchanged yesterday, but warned it “will act” to tighten monetary policy if inflation soars further.

After meeting in the financial capital Mumbai, the Reserve Bank of India (RBI) said its benchmark repo rate, at which it lends to commercial banks, would remain at 7.75 percent.

Most economists had predicted an increase after the widely watched wholesale inflation rate unexpectedly soared to a 14-month high of 7.52 percent in November, well above the RBI’s five percent comfort zone. Recently appointed RBI governor Raghuram Rajan said yesterday’s rate decision was a close call.

But he said there was “reason to wait before determining the course of monetary policy” given indications that vegetable prices — the main inflation driver —  may be dropping, after surging 95 percent from last year’s levels.

If inflation fails to soften when the next set of figures are published “the Reserve Bank will act,” Rajan stressed after chairing his third monetary policy meeting.

“In an environment where there is uncertainty, we have to wait for more data and see the impact of the last couple of rate hikes,” he told reporters after the decision. Another month’s reading will not put us way behind the ball. We are trying to be responsible central bankers.”

The bank raised rates in both September and October, saying it was determined to fight inflation, but government and business leaders have been clamouring for looser monetary policy to help spur a sharply slowing economy.

India posted growth of 4.8 percent in the second quarter ended September, far below the near double-digit expansion enjoyed when the economy was booming.

Rajan last week said the bank was “very uncomfortable” with the inflation level but added that growth was “weaker than we would like”.

He also kept the cash reserve ratio — the percentage of deposits banks must keep with the central bank — unchanged at 4.0 percent.

Shares on the Bombay Stock Exchange jumped 260.89 points or 1.27 percent to 20,873.03 points in afternoon trade, cheered by the move to keep rates on hold.

Siddhartha Sanyal, chief India economist with Barclays Capital, welcomed the decision. “A rate hike at this stage would have unduly penalised the industrial sector in which the momentum is already weak,” he said.

The Confederation of Indian Industry also praised the decision, and urged the government to boost agricultural supplies and productivity to help tame food prices.

“The RBI has demonstrated restraint and foresight to strike the right balance between inflation and growth,” said director general Chandrajit Banerjee.

But Sonal Varma, India economist at Nomura Financial Advisory and Securities, said inflation was likely to remain high and forecast the RBI would raise rates by a cumulative 50 basis points in the first half of 2014.

Finance Minister P Chidambaram expects the economy to expand by five percent this year, but some private economists see growth as low as four percent.

AFP

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