India’s c. bank holds rates but signals tight monetary policy ahead

India’s central bank kept its key lending rate steady for a second straight policy meeting on Thursday, as widely expected, but signalled that monetary conditions will remain tight for some time as it looks to further curb inflationary pressures.

The monetary policy committee (MPC), which has three members from the Reserve Bank of India (RBI) and three external members, kept the repo rate (INREPO=ECI) steady at 6.50% in a unanimous decision.

All 64 economists in a Reuters poll taken between May 16 and 29 expected no change in rates, and some had started pencilling in rate cuts early next year.

India’s hold on rates contrasts with recent central bank actions elsewhere.

Two major central banks — the Reserve Bank of Australia and the Bank of Canada — have surprised markets this week by resuming rate hikes to combat stubbornly high inflation, pushing up bond yields across developed markets.

Despite hitting an 18-month low of 4.70% in April, analysts do not expect India’s inflation to fall to the RBI’s 4% medium-term target for at least another two years.
Reuters Graphics
Reuters Graphics

The RBI maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of growth, Governor Shaktikanta Das said while announcing the MPC’s decision.

“Our goal is to achieve the inflation target of 4% and keeping inflation within the comfort band of 2-6% is not enough,” Das said.

The committee “will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target,” the MPC’s resolution said.

India’s benchmark 10-year bond yield < IN072633G=CC> rose above the 7% mark, against 6.99% before the decision as the central bank signalled it remained focused on bringing inflation down further.

The Indian rupee was little changed at 82.5850.

The central bank sees growth in 2023/24 at 6.5% while retail inflation is seen averaging 5.1%, Das said.

“Domestic macroeconomic fundamentals are strengthening,” he said.

“The RBI remains cautious on the inflation trajectory especially as inflation will remain above the 4% target for the foreseeable future,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.

“We maintain our call that the RBI will be on an extended pause,” he said.

Das said that it would remain “nimble” with its liquidity operations amid spikes in overnight rates despite surplus liquidity in the banking system.

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