The Reserve Bank of India left its key interest rate unchanged for a third straight meeting and ordered banks to set aside more cash to mop up excess liquidity, moves signaling heightened vigilance against food-driven inflation.
(Bloomberg) — The Reserve Bank of India left its key interest rate unchanged for a third straight meeting and ordered banks to set aside more cash to mop up excess liquidity, moves signaling heightened vigilance against food-driven inflation.
The central bank held the benchmark repurchase rate at 6.50% Thursday with the six-member monetary policy committee voting unanimously. All 42 economists in a Bloomberg survey predicted the move.
The panel decided 5:1 to retain a policy stance focused on “withdrawal of accommodation,” which was introduced in April last year. Nineteen of the 20 economists who shared their forecast on the stance expected the move, while one predicted a change in language.
“The MPC is prepared to act if the situation so warrants,” Governor Shaktikanta Das said in a livestreamed address on Thursday. “Bringing headline inflation within the tolerance band is not enough. We need to remain firmly focused on bringing inflation within the 4% target.”
Das also asked banks to set aside more cash temporarily in efforts to mitigate a surge in banking system liquidity after a “lukewarm” response to RBI’s 14-day variable reverse repo auctions. Banks will maintain an incremental cash reserve ratio of 10% from Aug. 12.
Excess liquidity with lenders has surged after over 76% of the highest denomination 2,000-rupee notes were returned to the financial system after the government gave citizens a Sept. 30 deadline to deposit the legal tender with banks.
READ: RBI Asks Banks to Set Aside More Cash on Poor Auction Response
The move was desirable in light of price stability and will be reviewed by Sept. 8, Das said in the post policy briefing, adding that a little above 1 trillion rupees ($12 billion) will be removed from banking system. There will be enough liquidity with banks to continue with lending activity in the festive season, he assured.
A gauge of banking index fell as much as 0.9%, dragging the benchmark stocks index also along with it after the move. Bond yields fell two basis points to 7.16%, while the rupee was little changed.
The central bank raised its inflation forecast to 5.4% for the year ending in March, from 5.1% in its last review. It retained a 6.5% growth target in the current fiscal year.
An uneven monsoon as well as floods in parts of India have lifted food prices in the world’s most populous country, in turn driving retail inflation to a three-month high of 4.81% in June. Economists see last month’s reading breaching the RBI’s 2%-6% target range due to high vegetable prices and rising costs of rice and wheat.
The monsoon, which waters nearly half of India’s farmlands, have been 2% above normal so far this season though there are reports of deficient rainfall in the northeast and eastern regions. El Nino is another concern for policymakers as it brings drier weather conditions, affecting crop yields.
The RBI has made significant progress on inflation but prices are expected to surge in July-August, Das said. “The Indian economy is exuding enhanced strength and stability despite the massive shocks to the global economy,” he added.
“The central bank has reiterated caution amid a spike in perishable food prices,” said Madhavi Arora, economist at Emkay Global. “We expect the RBI to stay on hold for an extended period and not precede the US Fed in any policy reversal in the current year.”
The central bank’s liquidity move could lead to mild hardening of money market rates for borrowers including NBFCs and corporates, she added.
What Bloomberg Economics Says
“The Reserve Bank of India’s decision to keep hawkish hold on rates was likely guided by a desire to support the recovery as it waits for more clarity on how persistent the latest spurt in inflation will be.”
— Abhishek Gupta, India Economist
For full note, click here
Despite the inflation pressures, Asia’s third largest economy is humming along. High frequency indicators, including services PMI and tax collections, show the activities are buoyant, giving the central bank some room to focus on reining in food and fuel prices ahead of polls scheduled for next year.
Here’s more measures from Das:
- RBI is working on bringing greater transparency in EMI-based floating rates to strengthen consumer protection.
- The central bank will review regulatory framework for infrastructure debt funds.
- Transaction limit for small value digital payments in offline mode of United Payments Interface, the country’s ubiquitous instant payment system, has been hiked to 500 rupees from 200 rupees.
- RBI will develop a public tech platform for frictionless credit delivery.
–With assistance from Subhadip Sircar and Kartik Goyal.
(Updates with more details in fifth and sixth paragraph. A earlier version of this story was corrected to make clear it was 5:1 decision on the policy stance)
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