RBI signals end to easing cycle, changes policy stance

Bloomberg

India’s central bank unexpectedly left borrowing costs unchanged for a second straight meeting and signaled that its interest-rate easing cycle is coming to an end.
The benchmark repurchase rate was left 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 just five of 39 economists in a Bloomberg survey, while the rest saw a cut to 6 percent. The central bank forecast a sharp recovery in growth during the year through March 2018, helped by a rebound in consumption that has been hurt by Prime Minister Narendra Modi’s unprecedented cash ban.
“The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetization on inflation and the output gap play out,” the RBI said.
Governor Urjit Patel said the shift to neutral gives the central bank policy flexibility. Sovereign bonds plunged as several analysts were counting on lower borrowing costs to revive an economy hit by Modi’s withdrawal of some high-denomination currency notes last year. India joins Russia’s central bank, which this month also held rates as the prospect of more tightening from the U.S. Federal Reserve limits space for global peers to ease.
“The RBI has become very hawkish at a time when the country faces an acute slowdown caused by the cash ban,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings Ltd. in Mumbai. “Even inflation readings have been benign. So it’s disappointing, their change in stance to neutral.”“The non-food part of the consumer price index has been sticky at 4.8 to 4.9 percent,” Patel said at a press conference, adding that had it not been for a destruction of vegetables and other perishables due to the cash ban, consumer price inflation would have been 140 basis points higher than the 3.4 percent seen in December.
The RBI’s decision risks frustrating Modi, who faces five state elections over February and March. Growth in gross domestic product may slow to 6.5 percent in the year through March from 7.9 percent the previous year as the cash clampdown hurts demand.
The government’s pledge to keep narrowing Asia’s widest budget deficit had spurred hopes for monetary easing as had inflation, which is below the 4 percent midpoint of the RBI’s target range.
However, a surge in deposits following the cash ban offers commercial lenders room to lower their rates, Governor Patel said. Economists including Sonal Varma at Nomura Holdings Inc. predict a sharp economic recovery June-December as cash in the system increases.
The yield on government notes due Sept. 2026 surged 26 basis points to 6.69 percent in Mumbai, according to prices from the RBI’s trading system.