Indian central bank keeps policy rate on hold, with eyes on inflation

[MUMBAI] India's central bank kept its policy rate on hold for a second meeting in a row, opting to wait for more clarity on the trend for inflation and on how a radical crackdown on "black money" would impact economic growth.

The Reserve Bank of India (RBI) also changed its stance to"neutral" from "accommodative", saying it would monitor inflation, despite calls for the central bank to support an economy dealt a major blow when Prime Minister Narendra Modi in November abolished high-value notes in a bid to target unaccounted cash, or "black money." The RBI monetary policy committee on Wednesday voted 6-0 to keep the repo rate at 6.25 per cent, marking its third straight unanimous decision since being established in September.

A Reuters poll last week showed 28 of 46 participants saw the RBI cutting the rate by 25 basis points to its lowest since November 2010 on Wednesday, but analysts warned it could be a close call. "The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out," said the RBI in a statement.

The RBI decision disappointed investors, sending India's benchmark 10-year bond yields up 13 bps from levels before the decision.

Many analysts believed the RBI had room to act, given inflation fell to a two-year low of 3.41 per cent in December, below the central bank's medium-term target of 4 per cent.

The government also delivered last week a budget that kept its fiscal deficit target for the year starting in April at 3.2 per cent of gross domestic product, below the 3.3 to 3.5 per cent expected by analysts.

The RBI also saw reduced need for additional rate cuts as banks have substantially slashed their lending rates this year after receiving a surge in deposits of old banknotes, and sought more time to gauge the impact of global headwinds on the rupee .

Between January 2015 and October 2016, the RBI cut rates 175 basis points.

In holding again on Wednesday, the RBI is seeing a reduced need for additional rate cuts as banks have substantially slashed their lending rates this year after receiving a surge in deposits of old banknotes, and sought more time to gauge the impact of global headwinds on the rupee.

But the decision to hold is a risk, as private forecasts are more pessimistic than the RBI. The International Monetary Fund, for example, sees the economy growing at 6.6 per cent for the year ending March, below the RBI's forecasts.

REUTERS