RBI keeps repo rate at 6 percent; stance stays ‘neutral’
Wed Feb 07 2018
Rajesh Sharma (2004 articles)

RBI keeps repo rate at 6 percent; stance stays ‘neutral’

The Reserve Bank of India (RBI) on Wednesday kept its main repo rate on hold and retained its “neutral” stance, warning that it will closely monitor accelerating inflation but also saying economic growth needs to be “carefully nurtured”.

In keeping the rate at 6.00 percent for a third straight policy meeting, as widely expected, the RBI sought to perform a delicate balancing act.

Surging oil and food prices pushed India’s annual consumer inflation to a 17-month high of 5.21 percent in December – well above the RBI’s 4 percent medium-target.

Yet, echoing the views of government officials and business executives, the RBI appeared mindful that tightening prematurely could dent an economy experiencing only a tentative recovery after growing at the slowest pace in about three years.

Bonds surged, sending the benchmark 10-year yield down as much as 11 basis points from levels before the decision, amid relief the RBI statement wasn’t as hawkish as some feared. The rupee and the broader NSE share index weakened slightly.

Nonetheless, analysts warned that rate hikes were still possible after the central bank projected higher inflation in months ahead.

“The guidance is likely to remain data-dependent, with a shift to tighten rates requiring further evidence in a build-up in inflationary pressures,” said Radhika Rao, group economist for DBS in Singapore.

All but two of 60 economists in a Reuters poll predicted the repo rate would be kept unchanged at its lowest level since November 2010. The reverse repo rate was held at 5.75 percent.

The RBI has kept the repo rate unchanged since a 25 bps cut in August, having taken advantage of a period of extraordinary low inflation to cut rates by 200 bps since early 2015.

But inflation is seen accelerating, especially after the government’s budget last week widened its fiscal deficit target for the year starting in April to finance a sharp rise in spending on rural areas and health-care.

The RBI said it expected inflation to accelerate to 5.1 to 5.6 percent in April-September, from 5.1 percent in the first three months of this year.

The central bank then said inflation would soften to 4.5-4.6 percent in October-March, due to softening food prices and a favourable base effect, but it called risks “tilted to the upside”.

There is “need for vigilance around the evolving inflation scenario in the coming months,” the RBI said.

The projections mean rate hike concerns will remain. Five members of the monetary policy committee voted to keep rates unchanged, with one, RBI Executive Director Michael Patra, voting for a 25 bps hike.

Bond investors have already priced in rate hikes, with 10-year yields rising more than 100 basis points since July, the biggest move since a crisis in 2013 with the rupee.

But any decision to move to raise rates, including by potentially shifting the RBI’s stance to “tightening” from “neutral” won’t be easy.

The RBI slightly lowered its gross value added forecast – a measure of economic growth it prefers – for the year ending in March to 6.6 percent from 6.7 percent.

India’s economy is expected to grow 7.0-7.5 percent in the 2018/19 fiscal year, below the 8 percent pace economist say is needed to create enough jobs for its youth.

The Monetary Policy Committee feels the “nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management,” the central bank said.

RBI Governor Urjit Patel told reporters it was prudent to stay the course.

“We felt that at this stage, without more data coming in, it was not necessary to change repo rate or the stance,” he said.

Rajesh Sharma

Rajesh Sharma

Rajesh Sharma is Correspondent for Stock Market of South East Asia based in Mumbai. He has been covering Asian markets for more than 5 years.