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Bloomberg
India’s central bank kept interest rates unchanged at a record low to support the economy, even as a split appeared among policy makers on continuing with the lower-for-longer stance.
The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee retained its main repurchase rate at 4%, as predicted by all 29 economists in a Bloomberg survey. Policy makers voted 5-1 in favour of keeping the stance accommodative, a departure from the past when they were unanimous on the need to support growth amid an impending third wave of the pandemic. That follows the pace of inflation breaching the RBI’s upper tolerance limit of 6% in the past two months, a trend attributed mainly to supply side disruptions caused by the coronavirus pandemic.
While the dissent from MPC member Jayanth Rama Varma isn’t the first, it comes at a time when markets are particularly edgy about any hints on unwinding of the monetary policy.
Last year, Varma opposed a decisive lower-for-longer-rate stance, citing a steep bond yield curve, which, he said, indicated doubts about the RBI’s ability to target inflation in a credible manner.
Governor Shaktikanta Das told reporters to wait for the meeting’s minutes on August 20 for details of Varma’s reservations. Shorter-dated bonds declined after the dissent vote. The yield on the 5.63% bond maturing in 2026 rose as much as 10 basis points to 5.81%, before paring gains as the RBI said it would also buy government bonds worth 500 billion rupees ($6.74 billion) in August.
Despite the inflationary pressures, Das said the time now was to nurture the “nascent†economic growth, given the recent high-frequency indicators from purchasing managers’ surveys to jobless data showing the recovery was muted. This “policy meeting finally saw some implicit acknowledgment that continued disregard for inflation ultimately comes at the cost of policy credibility and markets eventually exacting higher risk premia,†said Aurodeep Nandi, an economist with Nomura Holdings in Mumbai.