India holds rates steady in first decision under Modi

June 03, 2014 - 10:09:51 am

MUMBAI: India's central bank kept key interest rates unchanged Tuesday in its first monetary policy announcement since new pro-growth Prime Minister Narendra Modi took office.

Amid speculation the Reserve Bank of India's (RBI) stern stand on inflation could clash with Modi's aim of reviving the economy, the bank's chief Raghuram Rajan appeared to soften his hawkish tone.

After meeting in financial capital Mumbai, the RBI said the benchmark repo rate, at which it lends to commercial banks, would remain unchanged at 8.0 percent and the cash reserve ratio would be kept at 4.0 percent.

Modi's decisive election result, together with "improved sentiment" should create a sound environment for new policy steps and demand revival as well as gradual growth recovery, Rajan said.

"The tone of the RBI is definitely dovish. In fact, they seem to be now open to the idea of easing (rates)," said Vivek Rajpal, an Asia interest rates strategist for financial services firm Nomura in Singapore.

Rajan said it was appropriate to leave rates unchanged and allow the impact of three rate hikes since last September to feed through the system and offset inflationary pressures.

The former International Monetary Fund chief economist said if the economy stays on its current "disinflationary" course further rate hikes "will not be warranted".

The bank also cut the statutory liquidity ratio, the amount banks must keep in government securities, by 50 basis points to 22.5 percent to free up funds for the banking system and spur economic activity.

Rajan's policies since taking office have been widely credited with helping to reduce the current account deficit -- the widest measure of trade -- and restoring the rupee's stability.

But his tight monetary policy has disappointed business leaders who have called for lower borrowing costs to jumpstart growth -- a view analysts say could find sympathy with Modi's Bharatiya Janata Party (BJP) government.

The economy expanded by just 4.7 percent last year -- the lowest level in nearly a decade, and half the rate during India's boom years.

But with overall consumer inflation nudging nine percent and food inflation near double-digits, amid fears a weak monsoon could push prices higher, the RBI had scant scope to ease rates at Tuesday's meeting, economists said.

Rajan, whose chiselled features prompted the daily Times of India to describe him as an "economist with rock star appeal", warned when he took over the job he might have to take unpopular steps to achieve "low and stable inflation".

Modi's right-wing BJP swept to victory last month, ousting the left-leaning Congress, and he faces huge public expectations to live up to election promises of "better days ahead".

Although the RBI came in for criticism from the BJP before the election for keeping rates high, Rajan at a conference in Tokyo last week dismissed any discord.

There is "often a tendency to try and find a wedge between the two and widen the wedge", he said. (AFP)