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India’s central bank stuck to its hawkish policy tone Friday as warnings of a coming heat wave renewed fears of an inflation spike.
The Monetary Policy Committee voted five-to-one to keep the benchmark repurchase rate at 6.5% for a seventh straight meeting, a move predicted by all of the 39 economists in a Bloomberg survey. The six-member panel also decided to retain its policy stance of “withdrawal of accommodation.”
Governor Shaktikanta Das, delivering the last rate decision before elections kick off in two weeks time, said the economy’s strong growth prospects gives the RBI the space to “unwaveringly focus on price stability.”
Economists are starting to push back their expectations for rate cuts to later in the year, given hotter-than-usual temperatures across the country and growth rates of above 8%. Rising food prices have been the main driver of India’s inflation, which remains well above the RBI’s 4% target.
Das has said in the past the central bank wouldn’t consider easing unless inflation settles durably around its goal. He reiterated that objective Friday, saying high and persistent food inflation could fuel inflation expectations.
“It’s in the best interest of the economy that CPI continues to moderate and align itself to the target on a durable basis,” he said. “Until this is achieved our task remains unfinished.”
What Bloomberg Economics Says
The Reserve Bank of India’s decision to hold rates in tight territory suggests it wants to see inflation come down further toward its target before it pivots — a stance that needlessly sacrifices growth.
— Abhishek Gupta, India economist
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Stocks in India were steady following the policy announcement. The benchmark NSE Nifty 50 Index and government bonds pared some losses. The rupee edged 0.1% higher.
Although the economy is posting strong headline growth numbers, economists say the underlying momentum is much weaker. The RBI’s hawkish line may be a further drag on growth, they say.
“With food inflation being the prime driver of headline inflation while core inflation is at its pandemic low and well below RBI’s median inflation target, we feel that the hawkish monetary policy stance will potentially cost growth,” Kunal Kundu, India economist at Societe Generale SA, said by email.
Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd., said the Federal Reserve’s delay in cutting rates may also make the RBI wary of easing now. Like other emerging market central banks, the RBI tends to track Fed policy in order to keep its currency stable.
Bhardwaj sees the earliest possible RBI rate cuts likely in the final three months of the year.
In the absence of any rate cut, Das said the central bank will continue to remain flexible in its liquidity management. He also said the central bank wants money market interest rates to evolve in a manner that serves financial stability.
India’s bonds have benefited from a surge in foreign inflows ahead of the inclusion in global bond indexes and lower-than-expected government supply.
“The MPC has headroom to wait and monitor progress of the monsoon rains before moving on rates,” Radhika Rao, an economist at DBS Group Holdings Ltd., said by email. “We maintain our call for the rate cut cycle to start at the tail end of 2024.”
–With assistance from Jeanette Rodrigues and Shwetha Sunil.
(Updates with additional comments from governor and economist.)
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