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India Central Bank Surprises By Rate Hold, Sticks to Stance
(Bloomberg) -- India’s central bank unexpectedly left its benchmark interest rate unchanged as global banking woes add uncertainty to the economic outlook, while pledging to hike again if needed.
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The Reserve Bank of India’s six-member Monetary Policy Committee voted unanimously on Thursday to keep the repurchase rate at 6.50%. The decision was predicted by only six of 33 economists surveyed by Bloomberg, with the rest expecting a quarter-point increase.
The panel also decided to retain a policy stance focused on “withdrawal of accommodation.” That had been its approach since it started tightening in May 2022.
Bonds rallied, with the yield on the five-year bond falling by as much as 13 basis points to 7.02%. The rupee edged higher with stocks.
“The MPC unanimously decided to keep rates unchanged in this meeting with readiness to act if the situation so warrants,” Governor Shaktikanta Das said in a live-streamed address from Mumbai. “The MPC will not hesitate to act as needed in future meetings.”
The decision suggests the RBI wants to support Asia’s third-largest economy while also taking time to assess the impact of 250 basis points in total rate increases — its most aggressive tightening cycle in a decade. India’s economy is showing some signs of cooling off. Growth unexpectedly slowed to 4.4% in the quarter through December amid tighter rates.
The move also comes after the Reserve Bank of Australia on Tuesday paused rate hikes. It said a day later that the decision doesn’t mean an end to its tightening cycle.
Das said it’s necessary to evaluate the cumulative impact of past rate hikes, adding that “war against inflation has to continue.” The central bank lowered its inflation forecast to 5.2% from 5.3% for the year starting in April, and said it expected price pressures to moderate in the year ahead. It raised its growth forecast for FY24 to 6.5% from 6.4% earlier.
“For now it seems the RBI is done hiking. We’ll have more clarity on that in the next two months. The 10-year should trade around the 7.25% range; the rise in bond yields have taken a pause,” said Debendra Kumar Dash, head of fixed income at AU Small Finance Bank.
The surprise pause comes even as core inflation stayed above 6% for 17 straight months and amid confounding external conditions — including global banking turmoil and a surprise production cut by OPEC that could spur oil prices.
Indian banking system remains strong and healthy, Das said. “Nevertheless, we are keeping a close watch on banking sector turmoil in some developed countries.”
Das announced that the RBI will help develop an onshore non-deliverable forward market for foreign exchange trading. So far the NDF route has been the preferred route for foreign investors, but that market is based abroad, with London and Singapore hogging most of the volumes.
The RBI is also mindful of the government’s plan for yet another record borrowing of 15.43 trillion rupees ($188 billion) in the fiscal year that began April 1, of which 58% must be done by September. At the same time, an easing of the current account deficit in recent quarters is helping take some pressure off the central bank to keep on tightening to protect the rupee.
The RBI will ensure completion of the FY23 borrowing program in a non-disruptive manner, Das said.
Here’s more from Das:
RBI proposes permitting some banks to offer NDF contracts. Das said the central bank wants to help develop an onshore NDF market
RBI expects CAD to moderate in both FY22-23 and 23-24 that is viable and can be maintained
Das says to allow pre-sanctioned credit lines via the unified payments interface
--With assistance from Clarissa Batino, Tomoko Sato, Jeanette Rodrigues, Shwetha Sunil, Pradeep Kurup and Devidutta Tripathy.
(Updates with more details)
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