India's central bank holds rates as food prices soar
INDIA’S central bank again left interest rates unchanged on Thursday (Aug 10) but warned that higher food prices, caused in part by extreme weather, had impacted household budgets and halted a downward inflation trend.
The benchmark repurchase rate has remained at 6.50 per cent since the last hike by the Reserve Bank of India in February.
Consumer prices were “expected to surge during July (and) August, led by vegetable prices”, bank governor Shaktikanta Das said in a webcast.
“While the vegetable price shock may reverse quickly, possible El Nino weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far,” he added.
Inflation edged up to 4.81 per cent in June after falling to 4.31 per cent in May, down from a peak of 7.79 per cent in April 2022.
The bank’s decision was in line with analyst expectations.
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Economists warn that inflation in the short term could again breach the RBI’s upper tolerance band of 6.0 per cent because of rising prices for crude oil and food, including tomatoes – a staple in Indian cuisine.
Tomato prices have soared in recent months after inclement weather and pest attacks in major production belts, the RBI noted in its July bulletin.
India imports more than 80 per cent of its crude oil, making the world’s most populous nation vulnerable to skyrocketing prices driven by Russia’s invasion of Ukraine.
The RBI kicked off its monetary tightening cycle in May 2022 when rates stood at 4 per cent.
Das said the monetary policy committee remained “focused on withdrawal of accommodation”.
“Bringing headline inflation within the tolerance band is not enough. We need to remain firmly focused on aligning inflation to the target of 4.0 per cent,” he added.
Das also asked banks to set aside more cash temporarily in efforts to mitigate a surge in banking system liquidity after a “lukewarm” response to RBI’s 14-day variable reverse repo auctions. Banks will maintain an incremental cash reserve ratio of 10 per cent from Aug 12.
Excess liquidity with lenders has surged after over 76 per cent of the highest denomination 2,000-rupee notes were returned to the financial system after the government gave citizens a Sep 30 deadline to deposit the legal tender with banks.
The move was desirable in light of price stability and will be reviewed by Sep 8, Das said in the post policy briefing, adding that a little above one trillion rupees ($12 billion) will be removed from banking system. There will be enough liquidity with banks to continue with lending activity in the festive season, he assured.
Headline inflation projections were revised upwards to 5.4 per cent in the 2023-24 financial year from the previous forecast of 5.1 per cent.
The world’s fifth-largest economy grew by 6.1 per cent on-year in the March quarter to take annual expansion to 7.2 per cent, according to official data.
A gauge of banking index fell as much as 0.9 per cent, dragging the benchmark stocks index also along with it after the move. Bond yields fell two basis points to 7.16 per cent, while the rupee was little changed.
“The central bank has reiterated caution amid a spike in perishable food prices,” said Madhavi Arora, economist at Emkay Global. “We expect the RBI to stay on hold for an extended period and not precede the US Fed in any policy reversal in the current year.”
The central bank’s liquidity move could lead to mild hardening of money market rates for borrowers including NBFCs and corporates, she added.
Despite the inflation pressures, Asia’s third largest economy is humming along. High frequency indicators, including services PMI and tax collections, show the activities are buoyant, giving the central bank some room to focus on reining in food and fuel prices ahead of polls scheduled for next year. REUTERS, BLOOMBERG
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