Mumbai: The Reserve Bank of India (RBI) kept its policy rate on hold at 6.75 percent on Tuesday, as widely expected, opting to wait until after the government’s annual budget statement at the end February to decide on whether to cut interest rates further. Having cut the policy repo rate by 125 basis points in 2015, RBI Governor Raghuram Rajan warned on Friday against straying from the path of fiscal consolidation or relaxing the fight against inflation.
Rajan, in his statement on Tuesday, said the central bank would stay “accommodative” but would look forward to the government’s budget on Feb. 29, saying it needed to be one that supports growth and controls spending. How the government implements a planned 24 percent pay hike in salaries and pensions for some 10 million current and former government employees will also be key in determining the path of inflation, he noted.
“The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation,” Rajan said in his statement. “Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth.”
The rupee weakened from 67.88 per dollar to 67.96 after the decision, while the 10-year bond yield rose 2 basis points to 7.80 percent. The broader NSE share index was down 0.3 pct.If the fiscal deficit is kept within reason, then inflation trends over coming months could also favour hopes for lower interest rates.
Oil prices near 13 year lows and seasonally subdued food prices should help bring inflation down to the RBI’s target of 5 percent by March 2017, after it hit a 15-month high of 5.61 percent in December. Only two of 39 economists polled by Reuters had expected the RBI would cut rates this time. The rest predicted the policy repo rate would be left unchanged at 6.75 percent.
But more than half of them saw scope for at least a 25 bps rate cut by the end of June thanks to the reduced inflationary pressures, with some saying the reduction could come as early as March, before the next scheduled policy review in April.There is growing impatience with Prime Minister Narendra Modi’s government to deliver stronger growth, as vaunted economic reforms keep getting delayed.
The headline growth rate looks very creditable at projected 7.2 percent for the year ending in March. But private sector investment remains weak, and India needs sustained growth of around 8 percent to generate jobs for its growing workforce. Analysts expect India’s budget to slightly raise fiscal deficit targets to free up money for investment in infrastructure projects, while keeping subsidies and other spending under control.