The Reserve Bank of India struck a hawkish policy tone on Friday, saying inflation remains uncomfortably high and it may take measures to absorb excess cash in the market to keep price pressures under control.
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The Reserve Bank of India struck a hawkish policy tone on Friday, saying inflation remains uncomfortably high and it may take measures to absorb excess cash in the market to keep price pressures under control.
Governor Shaktikanta Das and the rest of his six-member Monetary Policy Committee voted unanimously to keep the benchmark repurchase rate at 6.5%, in line with economists’ forecasts. Most of the committee members voted to keep the policy stance focused on “withdrawal” of liquidity.
While inflation eased slightly to 6.83% in August and is expected to slow in coming months, Das reminded market watchers that price-growth remains well above the target.
“I would like to emphatically reiterate that our inflation target is 4% and not 2%-6%,” Das said. “Our aim is to align inflation to the target on a durable basis, while supporting growth.”
He also warned of inflation risks from excess liquidity in the market, and surprised investors by announcing the RBI was considering selling bonds in order to soak up extra cash. That suggests a shift away from using interest rates to liquidity-management tools to control inflation.
The yield on 10-year notes climbed as much as 13 basis points, the most since August last year, to 7.34% after his comments.
The move “came as a warning to markets that they want to keep tight liquidity to control inflation,” said Venkatakrishnan Srinivasan, founder at Rockfort Fincap.
What Bloomberg Economics Says…
By continuing its hawkish rate hold, the Reserve Bank of India is striking the right balance between supporting growth and buffering against the risk of additional Federal Reserve hikes and higher oil prices. Sticking to its “accommodation withdrawal” stance helps send the message that the central bank is committed to bringing inflation down to its 4% target over the medium term.
Abhishek Gupta, India economist
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Das also warned that the RBI should “remain vigilant and not give room to complacency.” High inflation is still a “major risk to stability, sustainable growth,” he said, highlighting uncertainty around the prices of key food crops.
India recorded the weakest monsoon rains in five years, with the June-September rainfall about 6% less than the long-term average. A rise in crude prices also doesn’t bode well for India, the world’s third-largest consumer of oil. The RBI’s projections are based on an oil price of $85 a barrel in the second half of the fiscal year.
“The statement underlines increased vigilance on food inflation and crude oil prices,” said Anubhuti Sahay, an economist at Standard Chartered Plc. “A backdrop of resilient growth domestically implies the repo rate is likely to stay on hold for longer.”
The RBI retained its inflation forecast of 5.4% for the year ending in March, and also kept its outlook for growth unchanged at 6.5%.
“This is a hawkish pause – replayed,” said Aurodeep Nandi, India economist at Nomura Holdings. Global and domestic uncertainties will dictate that the RBI remains nimble and alert to the risk of higher inflation going ahead, he said.
The RBI raised its key interest rate by 2.5 percentage points since last year to help rein in inflation and bolster the rupee. The Federal Reserve’s rate hikes and a strong dollar have undermined the rupee and local bonds. However, that pressure may ease in coming months once India is included in JPMorgan & Co.’s emerging market bond index early next year, prompting more foreign inflows.
–With assistance from Kartik Goyal and Ravil Shirodkar.
(Updates with comments from analysts.)
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