The Reserve Bank of India kept its policy rates on hold on Thursday and retained its “neutral” stance but lowered its inflation call, reducing the odds of a near-term rate hike and spurring a rally in stocks and bonds.
The RBI kept its policy repo rate unchanged at 6.00 percent for the fourth straight meeting as unanimously expected by 61 respondents in a Reuters poll. That level is the lowest since November 2010.
It also kept the reverse repo rate unchanged at 5.75 percent.
Five of six members on the monetary policy committee (MPC) voted for a hold, while one wanted a hike in the repo rate.
The MPC trimmed its April-September inflation projection to 4.7-5.1 percent, from a previous range of 5.1-5.6 percent that it had released in February.
The “statement was more dovish than expected, particularly the cut in inflation forecasts,” said Teresa John, an economist with Nirmal Bang Equities in Mumbai.
Inflation concerns have eased substantially in recent weeks following a crash in vegetable prices, which are expected to keep price pressures soft for the next few months. Oil prices remain a risk however, with India importing roughly 80 percent of its crude requirements.
Bonds rose after the RBI’s statement to their highest levels since early January, while the rupee firmed slightly and stocks extended early gains.
The 10-year benchmark bond yield fell to 7.16 percent from 7.28 percent before the announcement, while the rupee was trading at 65.00 to the dollar from 65.04 before. The main market index closed up 1.94 percent.
Stronger growth
The RBI projected economic growth of 7.4 percent for the current fiscal year that began on April 1, saying “several factors are expected to accelerate the pace of activity.”
The government had said in its budget announcement in February that it aims to achieve 7.0-7.5 percent growth in the current fiscal year.
The RBI warned, however, that even as global growth and trade have strengthened, rising trade protectionism and market volatility could derail the global recovery.
India regained its status as the world’s fastest growing major economy in the October-December quarter, expanding by 7.2 percent as government spending, manufacturing and services all picked up. But many economists doubt whether that pace can be sustained.
Inflation uncertainties
The MPC said that it sees inflation in the back half of this fiscal year at 4.4 percent.
After hitting a 17-month high in December, retail inflation eased for the second straight month in February, to a four-month low of 4.44 percent. But it remains higher than the RBI’s medium term target of 4 percent.
That has prompted most market watchers to push back their forecasts for a rate hike to early 2019, from earlier estimates of the second half of this year.
“We don’t anticipate a change in the repo rate, or stance of monetary policy until greater clarity emerges towards the second half of the year on the impact of minimum (crop) support prices and monsoon on the inflation trajectory,” said Aditi Nayar, the principal economist of rating agency ICRA.
While inflation fears have eased in the short-term, the RBI sounded cautious and opted to wait for more data instead of giving a clear indication of its policy path.
The “inflation print for February did turn out to be softer than our projection,” Governor Urjit Patel told media after the policy decision.
“However (the) MPC looks ahead. We noted there are several uncertainties around the baseline inflation path which is why we’ve kept our stance neutral and rate unchanged.”
The MPC reiterated its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis.
