RBI keeps rates on hold; says bud­get key to eas­ing

The Pak Banker - - COMPANIES/BOSS -

In­dia's cen­tral bank kept its pol­icy rate on hold at 6.75 per­cent on Tues­day, as widely ex­pected, opt­ing to wait un­til af­ter the govern­ment's an­nual bud­get state­ment at the end Fe­bru­ary to de­cide on whether to cut in­ter­est rates fur­ther.

Hav­ing cut the pol­icy repo rate by 125 ba­sis points in 2015, Re­serve Bank of In­dia Gov­er­nor Raghu­ram Ra­jan warned on Fri­day against stray­ing from the path of fis­cal con­sol­i­da­tion or re­lax­ing the fight against in­fla­tion.

Ra­jan, in his state­ment on Tues­day, said the cen­tral bank would stay "ac­com­moda­tive" but would look for­ward to the govern­ment's bud­get on Feb. 29, say­ing it needed to be one that sup­ports growth and con­trols spend­ing.

How the govern­ment im­ple­ments a planned 24 per­cent pay hike in salaries and pen­sions for some 10 mil­lion cur­rent and for­mer govern­ment em­ploy­ees will also be key in de­ter­min­ing the path of in­fla­tion, he noted.

"The Re­serve Bank con­tin­ues to be ac­com­moda­tive even as it leaves the pol­icy rate un­changed in this re­view, while await­ing fur­ther data on the de­vel­op­ment of in­fla­tion," Ra­jan said in his state­ment.

"Struc­tural re­forms in the forth­com­ing Union Bud­get that boost growth while con­trol­ling spend­ing will cre­ate more space for mon­e­tary pol­icy growth."

Ra­jan also re­it­er­ated the cen­tral bank would en­sure it is in­ject­ing suf­fi­cient liq­uid­ity into the bank­ing sys­tem in­clud­ing con­duct­ing more open mar­ket op­er­a­tion bond pur­chases.

Banks have blamed the lack of cash in the fi­nan­cial sys­tem for their in­abil­ity to match the RBI rate cuts last year, with most banks hav­ing low­ered lend­ing rates by only about 60 bps.

The 10-year bond yield rose around 5 ba­sis points to 7.83 per­cent from lev­els be­fore the de­ci­sion, but the ru­pee and the NSE share in­dex were broadly range­bound. If the fis­cal deficit is kept within rea­son, then in­fla­tion trends over com­ing months could also favour hopes for lower in­ter­est rates.

The RBI will have to keep watch over de­vel­op­ments in global mar­kets that be­gan this year in a jumpy state.

Other ma­jor cen­tral banks, no­tably the Bank of Ja­pan and Bank In­done­sia have eased mon­e­tary pol­icy, and the Euro­pean Cen­tral Bank is ex­pected to ease too, though the U.S. Fed­eral Re­serve is ex­pected to raise rates later this year.

Oil prices near 13-year lows and sea­son­ally sub­dued food pris should help bring in­fla­tion down to the RBI's tar­get of 5 per­cent by March 2017, af­ter it hit a 15month high of 5.61 per­cent in De­cem­ber.

to sup­port

Only 37 out 39 econ­o­mists polled by Reuters had ex­pected the RBI to leave the pol­icy repo rate un­changed for now.

But more than half of them saw scope for at least a 25 bps rate cut by the end of June thanks to the re­duced in­fla­tion­ary pres­sures, with some say­ing the re­duc­tion could come as early as March, be­fore the next sched­uled pol­icy re­view in April.

"If the govern­ment's bud­get looks to boost growth through re­forms and keep­ing spend­ing un­der check, we ex­pect an in­ter­meet­ing cut post the bud­get - 25 ba­sis points, may be even 50 bps," said Arvind Chari, head of fixed in­come and al­ter­na­tives at Quan­tum Ad­vi­sors in Mum­bai.

There is grow­ing im­pa­tience with Prime Min­is­ter Naren­dra Modi's govern­ment to de­liver stronger growth, as vaunted eco­nomic re­forms keep get­ting de­layed.

The head­line growth rate looks very cred­itable, with the RBI pro­ject­ing 7.4 per­cent for the year end­ing in March, al­beit with a down­ward bias, and 7.6 per­cent growth for 2016/17. But pri­vate sec­tor in­vest­ment re­mains weak, and In­dia needs sus­tained growth of around 8 per­cent to gen­er­ate jobs for its grow­ing work­force. An­a­lysts ex­pect In­dia's bud­get to slightly raise fis­cal deficit tar­gets to free up money for in­vest­ment in in­fra­struc­ture projects, while keep­ing sub­si­dies and other spend­ing un­der con­trol.

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