India’s RBI Keeps Rate Steady Following Expansionary Budget

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India’s RBI Keeps Rate Steady Following Expansionary Budget

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Anirban Nag
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(Bloomberg) -- India’s central bank kept interest rates on hold for a fourth straight meeting, days after Prime Minister Narendra Modi’s government unveiled an expansionary budget that could stoke inflationary pressures in the coming months.

The repurchase rate was maintained at 4%, Governor Shaktikanta Das said Friday. The decision was predicted by a majority of economists surveyed by Bloomberg. The six-member panel voted unanimously on the decision, while retaining its accommodative stance for as long as is necessary, he said.

The yield on benchmark government bonds were little changed on Friday, while the rupee was steady at 72.9650 per dollar. India’s benchmark S&P BSE Sensex held gains and was up 0.8% after the policy announcement, with lenders pacing the advance.

“Given that inflation has returned within the tolerance band, the MPC judged that the need of the hour is to continue to support growth assuage the impact of Covid-19 and return the economy to higher growth trajectory,” Das said.

The Reserve Bank of India, which lowered borrowing costs by 115 basis points last year, has been on pause mode since mid-2020 over inflation worries. Although inflation is currently back in the RBI’s comfort range, higher government spending risks stoking price pressures and complicating the consumer-price targeting central bank’s efforts to resume policy easing.

For its part, the RBI has started draining excess cash in the financial system to keep it from fanning inflationary pressures.

Retail inflation eased to 4.6% in December, marking the first time in nine months that the headline rate returned within the RBI’s 2%-6% target band. That nudged the RBI to lower its inflation forecast -- to 5.2% in the current quarter from 5.8% seen previously.

The RBI also upgraded its growth forecasts. It sees growth in the year starting April at 10.5% from an estimated 7.7% contraction in the current fiscal year. That is a tad lower than the government’s 11% estimate and comes amid early signs of a recovery gaining momentum.

(Updates with market reaction in the third paragraph)

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