In­dia holds in­ter­est rates steady de­spite cash chaos

Kuwait Times - - BUSINESS -

NEW DELHI: In­dia’s cen­tral bank left in­ter­est rates un­changed at 6.25 per­cent yes­ter­day, de­fy­ing ex­pec­ta­tions of a cut fol­low­ing the gov­ern­ment’s shock move to with­draw high-de­nom­i­na­tion ban­knotes from cir­cu­la­tion. The Re­serve Bank of In­dia (RBI) said the bench­mark repo rate-the level at which it lends to com­mer­cial banks-would stay steady af­ter it was cut to 6.25 per­cent in Oc­to­ber.

Lower in­ter­est rates boost con­sumer spend­ing, which is likely to see a sharp down­turn in the wake of the gov­ern­ment’s so called de­mon­e­ti­za­tion scheme but it can also cause an uptick in in­fla­tion. “The MPC (mon­e­tary pol­icy com­mit­tee) was of the view that given the re­duc­tion of pol­icy rate of 25 ba­sis points in Oc­to­ber... a fur­ther re­duc­tion in the pol­icy rate is not war­ranted at this junc­ture,” RBI gov­er­nor Urjt Pa­tel told re­porters.

The cen­tral bank also low­ered its out­look for gross value added growth from 7.6 per­cent to 7.1 per­cent. GVA is dif­fer­ent from gross do­mes­tic prod­uct, the mea­sure typ­i­cally used to show a coun­try’s eco­nomic growth. How­ever, it is in­dica­tive of how the GDP could move, al­though not by the same amount. Pres­sure to cut rates mounted last week, with an­a­lysts ex­pect­ing a 25 ba­sis points cut af­ter In­dia re­ported a lower-than-ex­pected 7.3 per­cent growth of GDP in the three months to the end of Septem­ber. While that is bet­ter than most ma­jor economies, it is still lower than ear­lier predictions. An­a­lysts ex­pect a fur­ther dip in those num­bers driven by a spend­ing slow­down af­ter most of In­dia’s cur­rency was with­drawn from cir­cu­la­tion last month by the gov­ern­ment in an ef­fort to bring back bil­lions in so-called ‘black’, or un­de­clared, money into the for­mal sys­tem. The move un­leashed chaos and a spend­ing crunch across sec­tors. Rat­ings agency Fitch has al­ready low­ered its In­dia growth fore­cast for the cur­rent fis­cal year from 7.4 per­cent to 6.9 per­cent, say­ing the cash crunch will bring “tem­po­rary dis­rup­tions” to eco­nomic ac­tiv­ity. Ashutosh Datar, an econ­o­mist at IIFL In­sti­tu­tional Eq­ui­ties, said he was sur­prised the RBI had not taken ac­tion to boost con­sumer spend­ing.

“This is a neg­a­tive sur­prise for sure. I was ex­pect­ing a 50 ba­sis points rate cut and they’ve done noth­ing,” he said. “Since the im­pact of the de­mon­e­ti­za­tion is un­clear, I ex­pected them to be proac­tive and do a rate cut. They’e done the ex­act op­po­site by de­cid­ing to wait and watch.” How­ever Su­nil Sinha, prin­ci­pal econ­o­mist at rat­ing agency In­dia Rat­ings & Re­search, said that the de­ci­sion to keep rates un­changed was log­i­cal. “RBI had al­ready ac­counted for in­fla­tion in the last mon­e­tary pol­icy and a fur­ther rate cut was not war­ranted,” said Sinha.

Speak­ing along­side Pa­tel, the RBI’s deputy gov­er­nor Rama Subramaniam Gandhi in­sisted there was no rea­son for con­sumers to panic de­spite the lack of cash and said ma­chines were work­ing flat out to print more notes.

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