India Keeps Rates On Hold

India Keeps Rates On Hold

Risk of rising inflation can be considered as one of the major factors that forced the RBI to keep policy rates unchanged in the fifth bi-monthly monetary policy review. The central bank reiterated that it is maintaining a "neutral" stance in monetary policy.

Mumbai, Dec. 6 (PTI): The Reserve Bank of India on Wednesday kept the key interest rate unchanged, as expected, but raised the inflation forecast for remainder of the current financial year to 4.3- 4.7 per cent. "Moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed". The uptick in the GDP (Gross Domestic Product) numbers for the September quarter - after seeing continuous decline for five quarters - eased pressure on the RBI to lower the monetary policy rates.

Fuel inflation, which has been on an upward trajectory since July, accelerated due to an increase liquefied petroleum gas (LPG), kerosene, coke and electricity prices. "Second, the impact of HRA by the Central Government is expected to peak in December", the RBI said.

I think the message to the market is clear that for a central bank, which is mandated to target inflation, when inflation is rising they will be probably taking pre-emptive actions and when inflation is falling they will be probably taking reactive action. According to a Bloomberg survey, 42 of the 48 economists see the repo rate, or the rate at which banks borrow from the RBI, unchanged at 6 per cent.

Most economists expect CPI inflation to trend close to or above 4% in the coming months.

The Reserve Bank of India (RBI) is working very closely with the government on a $32.43 billion bank recapitalisation plan it had outlined in October to deal with huge bad loans at state-run lenders.

Price of pulses continue to show a downward bias, RBI said, and going forward retail prices may come down post Goods and Services (GST) Council decision to bring down taxes on several goods and services. We maintain our call that the RBI will be on a pause in the near term.