India Central Bank Stands Pat On Rates; Hints At Open Market Bond Sales
India’s central bank left its benchmark interest rate unchanged for the fourth straight session on Friday but cited high inflation as a major risk to stability and sustainable growth and raised the possibility of open market bond sales to absorb excess liquidity.
The Monetary Policy Committee of the Reserve Bank of India unanimously decided to hold the policy repo rate at 6.50 percent.
The repo rate was kept unchanged for the fourth straight session. The RBI has lifted the benchmark rate by 250 basis points since May 2022 to tame high inflation.
By a majority of five out of six members, the committee decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the 4 percent target, while supporting growth.
Governor Shaktikanta Das said the rate was maintained at the current bi-monthly meeting after taking into account that the evolving inflation-growth dynamics and that past rate hikes are still working through the economy.
The governor said the committee remains highly alert and prepared to undertake timely policy measures, whenever needed to align inflation to the target and anchor inflation expectations.
Despite the larger-than-expected drop in CPI inflation in August, Das’ speech and the accompanying statement were arguably more hawkish than in August, Capital Economics’ economist Shilan Shah said.
The economist said there is a significant risk that the RBI delays the loosening that is currently expected to begin in the first quarter of 2024 into the middle of the next year.
The committee observed that headline inflation is ruling above the tolerance band and its alignment with the target is getting interrupted. In order to bring inflation down, monetary policy needs to remain actively disinflationary, the committee noted.
Consumer price inflation was projected at 5.4 percent for 2023-24, which was unchanged from the previous outlook.
The central bank noted that the domestic economy remained resilient on the back of strong domestic demand. Real GDP growth outlook for 2023-24 was retained at 6.5 percent.
However, the bank said headwinds from geopolitical tensions and geo-economic fragmentation, global financial market volatility, global economic slowdown and uneven monsoon pose risks to the outlook.
Early this week, the World Bank said India is set to expand strongly by 6.3 percent in the FY23/24 and 6.4 percent in the FY24/25.
Das today said the central bank will consider open market bond sales to manage liquidity. The timing and quantum of such operations will depend on the evolving liquidity conditions.
Following the bond sale announcement, the 10-year government bond yields rose around 15 basis points to 7.37 percent.
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