RBI leaves rates on hold, may cut early next year

Wednesday, 3 December 2014 00:00 - - {{hitsCtrl.values.hits}}

Reuters: The Reserve Bank of India (RBI) held interest rates steady as widely expected at its policy review on Tuesday, but said it could cut interest rates by early next year depending on whether inflation eases further and on fiscal developments. Forty-one of 45 economists polled by Reuters had forecast that the RBI would keep the repo rate at 8.00%, while four expected a reduction of 25 basis points.

The Reserve Bank of India (RBI) Governor Raghuram Rajan laughs while replying to a question during a news conference after the bi-monthly monetary policy review in Mumbai -REUTERS “A change in the monetary policy stance at the current juncture is premature,” the RBI said in its statement. “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.” The RBI’s next policy review is in early February, and most analysts had expected the central bank would either cut interest rates then or wait until April. Helped by tumbling oil prices, India’s annual consumer price inflation slowed to 5.52% in October, sharply down from a peak of 11.16% struck in November last year. The RBI said in its statement that it expected inflation for December to rise from current level, and added that “the key uncertainty is the durability of this upturn.” The RBI has targeted consumer price inflation at 6% for January 2016, and the central bank said risks to the target “appear evenly balanced under the current policy stance.” India’s benchmark 10-year bond yield fell 5 basis points on the day to 8.01%, while the rupee at 61.93 to the dollar was little changed from levels seen before the RBI announced its decision. “Clearly a very dovish statement,” said R. Sivakumar, head of fixed income for Axis Asset Management. “Markets like clarity and they are reading this as a signal that barring any surprises, a February 2015 rate cut looks likely.” While the decision to leave rates unchanged had been expected, officials had told Reuters last week that Finance Minister Arun Jaitley would press RBI Governor Raghuram Rajan for a cut in rates when they held a customary meeting before the policy review. There was no official confirmation whether that meeting had taken place. Limp economic growth during Prime Minister Narendra Modi’s first six months in power has caused unease in government quarters, raising some calls for an early rate reduction. India is struggling to emerge from its slowest phase of economic growth since the 1980s. Friday’s data showed year-on-year growth slipped to 5.3% in the July-September quarter, down from 5.7% in the previous quarter.