India’s central bank keeps interest rates unchanged

Mumbai: India’s central bank left interest rates unchanged for a second straight meeting as it awaits details of the government’s budget later this month, providing support for a currency battered by China-led market turmoil.
Governor Raghuram Rajan kept the benchmark repurchase rate at 6.75 per cent, the Reserve Bank of India (RBI) said in a statement in Mumbai on Tuesday.
The move was predicted by 42 of 44 economists in a survey, with two seeing a quarter- point cut.
“The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation,” Rajan said. Structural reforms in the budget “that boost growth while controlling spending will create more space for monetary policy to support growth” and ensure inflation hits the target of five per cent in March 2017, he said.
The central bank chief is caught between a stock selloff that’s pushing the rupee toward a record low and an economy that’s showing mixed signs of strength. While falling oil prices give him space to join Indonesia and Japan in easing further, lower rates may jeopardize his inflation target if the government reneges on its pledge to narrow the budget deficit.
The benchmark stock index fluctuated after the decision, sovereign bonds reversed gains and the rupee declined. The yield on the note due 2025 rose to 7.83 per cent as of 11:51am in Mumbai from 7.79 per cent on Monday.
“The probability of a rate change in April may have gone down a little bit because the inflation forecast is still five per cent,” said Indranil Pan, chief economist with IDFC. “To a certain extent, the cut will depend on the budget and on global currency movements and its implications for domestic inflation.”
While inflation is expected to be around five per cent by end-March 2017, planned pay increases for government employees “will impart upward momentum to this trajectory for a period of one to two years.”
The RBI will adjust the inflation forecast when clarity emerges on the timing of implementation.
Growth “is expected to strengthen gradually, notwithstanding significant headwinds.” Gross-value added growth for the 12 months ending March 2016 is kept unchanged at 7.4 per cent with a downside bias, and is projected at 7.6 per cent for the following 12 months.
The RBI separately announced steps to encourage the creation of start-ups. It proposed measures that would allow start-ups to tap foreign venture capital investment and said it is considering allowing these companies to issue innovative instruments such as convertible notes to attract foreign direct investment.
Prime Minister Narendra Modi’s government is due to present its budget on February 29. Rajan warned last week that deviating from the fiscal consolidation path could increase the government’s borrowing costs, both through a higher volume of bonds and a potential loss of credibility.
The Finance Ministry said last month it would stick with its fiscal deficit target of 3.5 per cent of gross domestic product for the year starting April 1. Even so, Standard Chartered and Citigroup predict the government will raise the target to at least 3.7 per cent to pay for mandatory salary increases without cutting infrastructure spending.
The government won’t cut spending on development activities, Finance Minister Arun Jaitley said in New Delhi after Rajan’s decision. Private investment is still weak, he said.
A larger shortfall risks stoking inflation, hindering Rajan’s efforts to slow consumer-price gains toward his five per cent target from 5.6 per cent in December. Most economists surveyed by Bloomberg last month foresaw just one 25-basis point cut for all of 2016, while swap traders are pricing in the possibility of a 50-point reduction.