India unexpectedly keeps rates unchanged before Fed decision

Blomberg.- India’s central bank unexpectedly kept interest rates unchanged before a possible increase in U.S. borrowing costs this month, as Governor Urjit Patel awaits clarity on the impact of the cash clampdown.

The benchmark repurchase rate will stay at a six-year low of 6.25 percent, the Reserve Bank of India said in a statement in Mumbai on Wednesday. The move was predicted by only eight of 44 economists in a Bloomberg survey, while 31 expected a cut to 6 percent and five saw a reduction to 5.75 percent.

«The imminent tightening of monetary policy in the U.S. is triggering bouts of high volatility in financial markets,» the RBI said. Back home, while growth will probably slow in the current year due to the cash ban, it’s important to analyze more information amid threats to meeting the inflation target, it said.

«Accordingly, the policy repo rate has been kept on hold in this review, while retaining an accommodative policy stance,» the RBI said.

The decision risks souring ties with Prime Minister Narendra Modi’s government, which said its cash ban would create room for lower borrowing costs. Economists predict India will lose its status as the world’s fastest-growing big economy as the currency clampdown dents demand.

Key points from the statement:

– All six members of the monetary policy committee voted to hold rates
– Inflation could slow by 10-15 basis points in October-December due to the cash clampdown. Consumer price gains are projected to be 5 percent in January-March with risks tilted to the upside, though lower than what was seen in October
– Gross value added — a key input of gross domestic product — will grow 7.1 percent instead of the 7.6 percent forecast earlier, with risks evenly balanced

Much of the GVA revision is due to lower-than-estimated GDP growth in June-September, Michael Patra, executive director at the central bank, told reporters at a briefing on Wednesday. The demonetization impact is restricted to about 15 basis points and is a «very transitory phenomenon, he said. «Monetary policy shouldn’t be reacting to a very transitory phenomenon.»

The yield on the benchmark note due September 2026 surged 15 basis points to 6.35 percent as of 3:21 p.m. in Mumbai. The rupee was little changed at 67.9050 a dollar and the benchmark equity index fell 0.6 percent.

‘Very Volatile’

«Further rate action will be very much data driven, both domestically and on the international front,» said Rupa R. Nitsure, group chief economist at L&T Financial Services Ltd. in Mumbai, who’d correctly predicted the central bank’s decision. «The global situation is very volatile.»

Private economists have slashed their growth forecasts for India as Modi’s shock Nov. 8 decision to ban 86 percent of currency in circulation dents demand in the cash-based economy. A steep economic slowdown risks hurting foreign investment into India and voters’ perceptions of Modi before key state elections next year. Patel, meanwhile is fighting fires on all fronts just three months into the job.

Apart from the concerns about growth, investors also questioned his low profile amid the cash chaos. Patel’s most immediate concern, however, will be to manage a surge in liquidity as Indians rush to exchange their defunct bank notes. Almost 12 trillion rupees ($177 billion) has poured into bank deposits, Deputy Governor R. Gandhi said, pushing the monetary authority to resort to extraordinary measures.
Costs, Benefits

It announced the easing of one of these measures on Wednesday. From Dec. 10, banks would no longer need to sequester these deposits, the central bank said in a separate statement. The liquidity released by this relaxation will be absorbed by special intervention bonds issued by the government.

India will benefit from Modi’s demonetization because the replacement bills will be harder to forge, and better transparency and tax compliance as Indians eschew cash for digital payments will boost government revenues, Patel said.

«The costs, we are witnessing now — and that’s in terms of inconvenience, which we are aware of,» he said. «The benefits are in the medium term and the long term.»

Para ver la noticia original, haga clic aquí.

Be the first to comment on "India unexpectedly keeps rates unchanged before Fed decision"

Leave a comment

Your email address will not be published.