RBI keeps interest rates unchanged; rate cut likely in early 2015 - Livemint

While explaining its decision, RBI said that while headline inflation has been receding steadily and current readings are below the January 2015 target of 8% as well as the January 2016 target of 6%, the key uncertainty is the durability of this upturn. Photo: Mint

Mumbai: The Reserve Bank of India expectedly (RBI) kept policy rates unchanged in its monetary policy review on Tuesday, even as the central bank indicated rates could ease early next year as inflation shows signs of cooling.

The repurchase rate, at which the central bank infuses liquidity into the system, remained at 8% and the cash reserve ratio (CRR), or the portion of a bank’s money maintained with the central bank in cash, remained at 4%.

“A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” said the RBI’s policy statement, suggesting that the first rate cut may come in early 2015.

At a post-policy media briefing, RBI governor Raghuram Rajan clarified that outside policy review does not mean that the central bank is bringing uncertainty back as a tool for monetary policy announcement.

“It should be interpreted as our own willingness that once we have enough information, we will make a move. Sometimes, the information comes in between policy cycles. We just want to say we want to remain alert to all the information that comes to us,” Rajan said.

While explaining its decision, RBI said that while inflation has been receding steadily and current readings are below the January 2015 target of 8% as well as the January 2016 target of 6%, the key “uncertainty is the durability of this upturn”.

“Risks from imported inflation appear to be retreating, given the softening of international commodity prices, especially crude, and reasonable stability in the foreign exchange market. Accordingly, the central forecast for CPI (consumer price index) inflation is revised down to 6% for March 2015,” said RBI.

At the post-policy conference, Rajan said containing inflation is a necessity for an enduring growth path for the economy.

India’s gross domestic product (GDP) fell in the September quarter to 5.3%, down from June quarter’s 5.7%. Still, the GDP is higher than March quarter’s 4.6%. Other indicators like the HSBC Markit purchasing managers’ index (PMI) for manufacturing, however, have rebounded. The manufacturing PMI for November reached a 21-month peak, according to data released on Monday.

Companies and even the government wants RBI to cut rates to make credit cheaper and lift growth, but Rajan said the only way to have a sustainable growth is through benign inflation.

“The fundamental way of establishing a sustainable growth, again and again we have seen, is moderate inflation,” Rajan said. “We are not talking about growth for some quarters, but for years to come.”

Rajan said RBI wants the highest growth rate for India, but for that inflation needs to be tamed. The central bank is working on a framework for long-term growth, “and if we reach there, you will see years of sustainable growth for corporate India.”

Rajan criticized companies for borrowing too much, which has led to high interest payments. Even as companies are clamouring for a rate cut, Rajan said it is not RBI’s job to compensate those firms for the high-risk premium they have taken for themselves. RBI’s job is to be concerned about the risk-free interest rate, and companies should work on their own risk premium, which have made them unable or unwilling to pay high interest costs, he said.

The central bank’s immediate target is containing CPI inflation at 8% by January, which has been achieved. However, RBI is targeting to bring down inflation to 6% by January 2016 and eventually anchor inflation close to 4%, plus or minus 2 percentage points.

Consumer price inflation for October fell to 5.52% from 6.46% in September and 10.09% a year ago.

Soon after RBI’s announcement, the yield on the 10-year benchmark bond fell to 8.049% from 8.077%. Bond prices and yields move in opposite directions.

At 12.05pm, the yields on the 10-year bond was at 8.01%, while the rupee was up 0.16% to 61.92 per dollar. The benchmark BSE Sensex lost 0.5% to 28,410 points.

The partially convertible rupee had opened at 61.99 per dollar compared with its Monday’s close of 62.02.

The Sensex was trading at 28,469.70 points before the announcement. The BSE Bankex, the gauge of major bank stocks, fell by 0.6% to 21,104.12 points from its Monday’s close. Before the announcement, it was at 21,149.88 points.

A Bloomberg poll of 48 analysts had shown that barring four, none expected a rate cut. The last time RBI adjusted the policy rate was on 28 January, when it increased the repo rate from 7.75% to 8%.

The policy is in line with the stance RBI had communicated to the market on several occasions earlier, including in the fourth bi-monthly monetary policy review on 30 September.

The central bank in the past policies had indicated that upside risks to its medium-term inflation targets persist. Rajan has argued that it is important to tackle underlying inflation pressures before considering a cut in rates.

“We are not against growth but we do think growth will be most benefited if we disinflate the economy and we don’t have to fight this fight again,” Rajan had said on 6 August. “Let’s fight the anti-inflation fight once and let’s win. That will create the best condition for sustainable growth.”

However, the sharp fall in global oil prices is likely to help keep the government’s fiscal deficit and inflationary pressures in check.