1 Apr, 2014

RBI leaves repo rate on hold at 8 percent, as expected

The Reserve Bank of India (RBI) left its policy interest rate unchanged on Tuesday, as expected, and said it does not expect further near-term policy tightening if headline inflation continues to ease towards the bank’s targeted level.

The RBI kept its key repo rate at 8.00 percent, in line with the forecast of all 53 economists in a Reuters poll last week.

Since taking office in September, RBI Governor Raghuram Rajan has raised the repo rate three times by a total of 75 basis points.

India’s consumer price index inflation eased to 8.10 percent in February, near the RBI’s January 2015 target of 8 percent, while the wholesale price index slowed to a 9-month low of 4.68 percent.

The RBI wants CPI inflation to ease further to 6 percent by January 2016.

“The Reserve Bank’s policy stance will be firmly focused on keeping the economy on a disinflationary glide path,” Rajan said.

“If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture,” he said in his policy statement.

Rajan expressed concern about risks to growth in an economy expanding at under 5 percent, its slowest in a decade. He said growth in the fiscal year that began this month is expected in a range of 5 to 6 percent, with downside risks.

“Lead indicators do not point to any sustained revival in industry and services as yet,” Rajan said.

The RBI also reduced the availability of overnight funds from its repo window for banks and increased the amount that banks may borrow from its term repo window in a bid to reduce lenders’ reliance on short-term central bank funding.

For full coverage of RBI rate decision, click here

Graphic on India WPI, rates, industrial output: link.reuters.com/deq95s

Graphic on India WPI, rates, 1 yr OIS: link.reuters.com/saq26s

Graphic on India rates, 1 yr OIS, 5 yr OIS: link.reuters.com/nad57s

Indian stocks were little changed, while the local bond and foreign exchange markets were closed on Tuesday.

With India heading for elections running from April 7 to May 12, Rajan had been expected to wait for a glimpse of the next government’s economic policies as well as the outlook for monsoon season rains that begin in June before making a policy move, economists said.

“With upcoming elections adding another event risk to the horizon along with the likelihood that poor weather conditions might feed into inflation yet again, the prudent bias will be to maintain the tight hold on policy levers,” Radhika Rao, economist at DBS in Singapore, said after the policy statement.

(Editing by Kim Coghill)

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