By Jaspreet Kalra and Abinaya V
MUMBAI, Aug 5 (Reuters) – The Reserve Bank of India left its benchmark repo rate unchanged at 5.25% on Wednesday, as policymakers await clearer evidence on whether rising oil prices are fuelling broader inflationary pressures in Asia’s third-largest economy.
The decision to hold rates sets India apart from a growing band of regional peers including Indonesia, the Philippines and others that have responded to the inflationary fallout from higher energy prices and war-driven currency volatility by tightening policy. Instead, the RBI announced a series of steps at the previous meeting to boost capital inflows and support the rupee.
The central bank’s six-member rate panel, which includes three external members, voted unanimously to keep rates on hold. The rate-setting panel also retained the policy stance at “neutral”.
An overwhelming majority of 68 out of 72 economists polled by Reuters had forecast that the RBI would stand pat on its benchmark interest rates.
Headline inflation has moved above target mainly because of higher fuel prices, while broader price pressures remain in check, RBI Governor Sanjay Malhotra said while announcing the policy.
Signalling no rush to act until there is greater clarity on inflation, Malhotra reaffirmed the RBI’s “resolute” commitment to its inflation target.
India’s benchmark 10-year bond yield was largely unchanged at 6.78%, while the rupee weakened over 0.1% to 95.09. The benchmark Nifty 50 index was 0.1% higher, while BSE Sensex stayed 0.5% higher.
The RBI’s message was “well balanced, highlighting the risks and, hence, the policy decisions ahead being data-dependent,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
Bhardwaj continues to see scope for cumulative 50 basis points of hikes in the policy rate between now and March-end.
INFLATION IN CHECK; GROWTH RESILIENT
The central bank cut its forecast for average inflation in the current financial year to 5% from the 5.1% it projected in June. The forecast for core inflation, which excludes food and fuel, was cut more steeply to 4.3% from 4.7% earlier.
Retail inflation in India rose above the central bank’s medium term target of 4% for the first time in 17 months in June but is projected to stay within its tolerance band of 2%-6% in the current fiscal year, giving policymakers breathing room on rates.
The central bank also nudged up its growth forecast to 6.7% from 6.6%, reflecting confidence in the economy’s resilience despite a mixed flow of incoming data. While manufacturing activity has softened, with the purchasing managers’ index slipping to a five-year low, credit demand remains robust, expanding at nearly 18%.
Domestic demand remains resilient but a weak monsoon, trade and geopolitical uncertainties could emerge as risks to growth, Malhotra said.
BALANCE OF PAYMENTS SURPLUS
India’s external balance of payments is on course to post a “healthy surplus” this year, Malhotra said, adding that capital flow measures announced in June have boosted foreign inflows.
Those steps included a subsidised dollar deposit scheme aimed at the Indian diaspora, alongside incentives for banks and government companies to raise overseas borrowings.
The initiatives have drawn more than $41 billion in inflows so far.
Those inflows, along with lower oil prices and central bank dollar sales, have helped steady sentiment toward the rupee. The currency has recovered about 1% since June, although it remains down 5.4% for the year.
“We will continue with our policy of it (the exchange rate) being determined by market forces, while curbing excessive volatility, checking speculative behaviour and preventing disorderly movements to ensure that it is not out of sync with fundamentals or disruptive of economic activity,” Malhotra said.
(Reporting by Jaspreet Kalra and Abinaya V; Additional reporting by Dharamraj Dhutia; Writing by Ira Dugal; Editing by Mrigank Dhaniwala and Shri Navaratnam)
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