It came as no surprise to many economists that India’s central bank kept its key lending rate unchanged at 8.5% in its mid-quarter review of monetary policy Thursday. The Reserve Bank of India has said it is committed to reducing inflation. In recent days, the risks of inflation have increased driven by soaring prices for crude oil, the country’s large fiscal deficit, and a continuing weakening of the rupee.
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The Reserve Bank of India says that it is committed to reducing inflation.
In a statement the RBI said that “notwithstanding the deceleration in growth, inflation risks remain high, which will influence both the timing and magnitude of future rate actions.”
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While today’s steady course was expected, it comes with the danger of keeping a lid on investments by corporate India, adding to the slowing down in economic growth. This has been a key criticism of the central bank over the past year as well—that as it steadily increased interest rates over the past two years to curtail inflation, the move had a spillover effect on discouraging investments by the corporate sector. That concern continues with today’s lack of action.
Chandrajit Banerjee, president of the Confederation of Indian Industry, said the trade body would have liked to see a cut in interest rates as that would help boost investment.
“Capital creation in the economy has been growing at a negative pace and this does not bode well for the growth outlook of the economy for the medium term,” Mr. Banerjee said in a statement. “We have to look at the medium to longer term perspective and for that it is imperative that the investment demand in the economy picks up to ensure that the economic fundamentals remain strong enough such that minor ups and downs can be weathered by a robust economy.”
Here’s a roundup of what some economists had to say:
Samiran Chakraborty, regional head of research, India, Standard Chartered Bank:
Although the decision to keep rates on hold was not a surprise, we had anticipated the outlook and guidance part to be more dovish. In earlier statements from the RBI our sense was that its bias was shifting toward supporting growth and investment. But it looks like the focus on inflation is still very much there. On the positive side it shows that the central bank is determined to bring down inflation and this will strengthen its credibility over the longer term as an inflation-fighting central bank.
Rahul Bajoria, regional economist Malaysia, Thailand and India, at Barclays Capital:
They are a bit more cognizant of the fact that there’s a need to normalize rates toward the downside. A lot of the jump in last industrial growth numbers was superficial as some of the core issues—intermediate goods and capital goods—were running negative year on year. The RBI wants to make sure that the good work done in the last couple of years does not go to waste.
Tushar Poddar, managing director, Goldman Sachs:
While we expected the RBI to keep all rates unchanged and mention risks to inflation from oil and loose fiscal policy, we were expecting more concern about the growth slowdown in the statement. We think the RBI is clearly indicating that the key driver of rate cuts in the future will be the trajectory of core inflation and developments in oil prices, rather than activity numbers. Our key view remains that core inflation will be well contained in FY13 due to weak domestic demand and low pricing power. However, rising oil prices since the start of 2012 have clearly increased the risks to our view.
Robert Prior-Wandesforde, director of Asian economics, Credit Suisse:
It seems to us that, since Governor Subbarao took the helm in September 2008, the repo rate has become a lagging function of inflationary developments. As such, we take today’s lack of action and accompanying statement as indicating that the central bank needs greater reassurance that inflationary pressures are indeed on their way down. We suspect it will get it. At the same time, while economic growth has probably bottomed, we doubt it will move above trend until the March quarter of 2013 and then only if interest rates do come down.
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Via: India Real Time