RBI chief holds key rate, re­bufs pres­sure from govt

The Pak Banker - - FRONT PAGE -

In­dian cen­tral bank Gover­nor Raghu­ram Ra­jan kept in­ter­est rates un­changed, re­buff­ing pres­sure from the Fi­nance Min­istry to re­duce bor­row­ing costs that are among the high­est in Asia.

Ra­jan left the bench­mark re­pur­chase rate at 7.25 per­cent af­ter three cuts this year, in­clud­ing in June, the Re­serve Bank of In­dia said in a state­ment in Mum­bai on Tues­day. The move was pre­dicted by 39 of 42 econ­o­mists in a Bloomberg News sur­vey. Three ex­pected a cut to 7 per­cent.

"Given that pol­icy ac­tion was front­loaded in June, it is pru­dent to keep the pol­icy rate un­changed at the cur­rent junc­ture while main­tain­ing the ac­com­moda­tive stance of mon­e­tary pol­icy," Ra­jan said in a state­ment. The cen­tral bank will mon­i­tor for room to ease pol­icy as it awaits greater trans­mis­sion of pre­vi­ous cuts, he said.

Ra­jan wants to en­sure his in­fla­tion tar­get of 6 per­cent by Jan­uary isn't at risk from surg­ing food prices, a poor mon­soon and a pos­si­ble in­crease in U.S. in­ter­est rates next month. A Fi­nance Min­istry of­fi­cial on Mon­day said in­fla­tion can't be the pri­mary con­cern of pol­icy mak­ers, the latest sign of grow­ing ten­sions with the cen­tral bank.

"A rate cut is not a given," said De­vika Mehndi­ratta, a Sin­ga­pore-based economist at Aus­tralia & New Zealand Bank­ing Group Ltd. In­fla­tion would need to be around the RBI's pro­jec­tions for fur­ther eas­ing to be con­sid­ered, she said.

In­dia's bench­mark stock in­dex was trad­ing 0.1 per­cent lower at 11:57 a.m. in Mum­bai. The rupee strength­ened 0.2 per- cent to 63.94 a dol­lar, and the yield on the 10-year sov­er­eign bond was at 7.81 per­cent, lit­tle changed from yesterday.

In­dia's pause con­trasts with eas­ing from China and Rus­sia even as Asia's third­biggest econ­omy shows mixed signs of strength. Ra­jan said the "out­look for growth is im­prov­ing grad­u­ally," while not­ing that new in­vest­ment in In­dia re­mains sub­dued and a weaker global ex­pan­sion may hurt ex­ports.

Risks to his 6 per­cent in­fla­tion tar­get in Jan­uary are "broadly bal­anced," Ra­jan said, with softer crude prices and a near-nor­mal mon­soon off­set­ting in­fla­tion con­di­tions in June that "sur­prised some­what on the up­side." In­fla­tion pro­jec­tions for Jan­uary to March 2016 are lower by about 0.2 per­cent, he said. Food prices led by pulses pushed in­fla­tion to 5.4 per­cent in June, faster than es­ti­mated though be­low Ra­jan's tar­get for a tenth straight month. While JuneSeptem­ber mon­soon rain­fall has been 6 per­cent be­low nor­mal through Aug. 3, that's not as bad as ini­tially forecast.

"Sig­nif­i­cant un­cer­tainty will be re­solved in the com­ing months, in­clud­ing the likely per­sis­tence of re­cent in­fla­tion­ary pres­sures, the full mon­soon out­turn, as well as pos­si­ble Fed­eral Re­serve ac­tions," Ra­jan said. While Prime Min­is­ter Naren­dra Modi's gov­ern­ment agreed this year to an in­fla­tion tar­get of 2-6 per­cent, a draft bill un­veiled last month threat­ens to wa­ter down the pro­posal. It would give the gov­ern­ment ma­jor­ity con­trol of a mon­e­tary pol­icy com­mit­tee and re­view the in­fla­tion tar­get ev­ery three years, putting it at odds with rec­om­men­da­tions from the cen­tral bank.

"The gov­ern­ment and RBI have reached a broad con­sen­sus on what such a com­mit­tee should look like and what the pow­ers of the gover­nor should be," Ra­jan said in a brief­ing in Mum­bai on Tues­day. "While the de­tails have to be ironed out, there are no dif­fer­ences be­tween the gov­ern­ment and the RBI in this mat­ter."

Modi's ad­min­is­tra­tion has taken steps in re­cent weeks to con­tain food costs by lim­it­ing gains in guar­an­teed prices for rice and lentils. Food ac­counts for al­most half of the con­sumer-price in­dex bas­ket.

Ra­jan needs to de­cide how much more sup­port he's able to pro­vide to an econ­omy where ex­ports have fallen for seven straight months, fac­tory out­put's slow­ing and credit growth has failed to ac­cel­er­ate. The mixed sig­nals cloud the out­look in an econ­omy the gov­ern­ment says grew 7.5 per­cent in Jan­uary-March un­der a new cal­cu­la­tion method.

"Though 7.5 per­cent GDP growth ap­pears high, it is be­low In­dia's po­ten­tial" of around 10 per­cent, Faraz Syed, an economist at Moody's An­a­lyt­ics in Syd­ney, wrote in a July 29 re­port. "The big­gest hur­dle is pri­vate in­vest­ment."

While most econ­o­mists in a sep­a­rate sur­vey see Ra­jan keep­ing rates un­changed in the com­ing months, be­fore Tues­day's de­ci­sion swap traders were pric­ing in the chances of a cut to 7 per­cent by end-2015. That's the steep­est de­crease af­ter Tur­key among 14 emerg­ing mar­kets tracked by HSBC Hold­ings Plc. Banks will lower lend­ing rates fur­ther be­tween Oc­to­berDe­cem­ber as de­mand for loans picks up, the cen­tral bank said.

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