India holds rates, keeps markets guessing

Anirban Nag and Iain Marlow

India’s central bank is making a habit of surprising markets. It may be in for a nasty surprise of its own if the economy hobbled by an unprecedented cash crunch fails to snap back.

The Reserve Bank of India has gone against consensus at every meeting since Governor Urjit Patel took over in September. Policy makers yesterday kept i nterest rates unchanged and raised the bar on future easing by abandoning an accommodative policy stance that’s been in place since June 2015. They cited stubbornly high underlying inflation and rising commodity prices.

Patel is withholding monetary support at a time when India’s economy is vulnerable to a paucity of cash that’s dented consumption and forced economists to slash growth forecasts in what’s been the world’s fastestgrowing major economy.

The central bank predicted a sharp economic recovery, echoing assurances of a transient slowdown made last week by Finance Minister Arun Jaitley as he pledged to rein in Asia’s widest budget deficit.

“At a time when everybody is concerned about the hit to growth due to the cash crunch, we are seeing that the RBI is fixated with inflation,” said Priyanka Kishore, the Asia economist for Oxford Economics in Singapore. “An accommodative stance would have likely served the economy better while the monetary policy committee assessed the impact of demonetisation.”

India’s sovereign bonds slumped Wednesday, driving the 10-year bond yield 31 basis points higher to 6.74 per cent in its biggest surge since 2013. The rupee led gains among Asian currencies, climbing 0.3 per cent, as some investors were drawn to the higher yields.

Patel joins policy makers from Australia to Thailand and Russia in holding benchmark rates as more tightening from the US Federal Reserve limits space for global peers to ease.