India holds rates at 7-year low to spur flagging growth

RBI’s decision may add pressure on the govt to boost investment, though it has limited room to spend

by BLOOMBERG

MUMBAIIndia held interest rates at the lowest level since 2010, as it looks to spur growth without stoking inflation.

The benchmark repurchase rate was kept at 6%, the Reserve Bank of India (RBI) said in a statement in Mumbai yesterday, as predicted by 31 of 32 economists in a Bloomberg survey. One had expected a cut to 5.75%.

Five on the RBI’s six-member monetary policy committee voted for no change in the key rate as the central bank raised its inflation forecast and lowered the growth estimate. The panel reiterated that it is “imperative to reinvigorate investment activity” and said it stays committed to keeping inflation close to 4%.

“Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil,” the central bank said. “The possibility of fiscal slippages may add to this momentum in the future.”

The rupee held on to its gains, trading at 65.25 a dollar. Both S&P BSE Sensex and the NSE Nifty 50 Index were up 0.5%.

“The RBI’s decision to keep policy unchanged puts it further behind the rates curve,” said Abhishek Gupta, an economist at Bloomberg Intelligence. “By keeping real interest rates high even as growth slows sharply and bad loans snowball, the central bank is damping sentiment and imposing a stiff headwind on the economic recovery.”

Inflation during OctoberMarch forecast 4.2% to 4.6%, faster than previous 3.5% to 4.5% projection. Forecast for gross value added — a key measure of growth — cut to 6.7% for the year through March 2018 from 7.3%. RBI lowered the proportion of deposits banks need to invest in specified securities, such as government bonds, to 19.5% from 20% effective Oct 14.

The central bank’s decision may add pressure on the government to boost investment, though it has limited room to spend. Slowing economic activity has hit India’s revenues, even while rebounding global oil costs have stoked inflation. Late on Tuesday, the government cut a domestic levy on petrol and diesel that Nomura Holdings Inc estimates will lower inflation directly by eight-nine basis points while the administration will lose 260 billion rupees (RM16.9 billion) each year.

Gross domestic product in the US$2 trillion (RM8.46 trillion) economy will expand 6.8% in the year through March, the slowest pace in four years, according to the median estimate in a Bloomberg survey published late last month. The forecast was lowered from 7.3% predicted in August as Prime Minister Narendra Modi’s abrupt decision to ban high-value bills and uncertainty stemming from the introduction of the Goods and Services Tax disrupted business. — Bloomberg