RBI leaves repo rate unchanged but promises to stay 'accommodative'

Image: Danish Siddiqui / Reuters

Despite Tuesday’s decision to hold rates, economists are optimistic that the RBI will lower rates in the near future

The Reserve Bank of India (RBI) kept its key repo rate unchanged at 6.75 percent on Tuesday, as was widely expected by economists. But RBI governor Raghuram Rajan said the central bank remains “accommodative” in its policy stance [this indicates a loose monetary policy where rates are lowered to stimulate economic growth].

Despite the decision to hold rates, economists are optimistic that the RBI will lower rates in the near future as they expect consumer inflation to come down soon. India’s annual consumer price inflation (CPI) edged up to 5 percent in October—a four-month high—compared with 4.41 percent in September, according to official data.

The RBI will watch how commodity prices, particularly food and oil, play out in the coming months. Besides inflation, the impact of the Seventh Pay Commission and external factors like the US Fed’s decision on interest rates will influence the RBI.

Experts believe the US central bank may hike rates later this month, which will further strengthen the dollar and trigger capital outflows from emerging markets like India.

Rajan said in the eventuality of a US policy rate hike, the Indian markets would stabilise, after witnessing some volatility. The benchmark Sensex was up 0.24 percent, or 63.02 points, at 26,208.69 points and the Nifty was up 0.34 percent at 7,962.20 points in afternoon trade on Tuesday.

“We are still accommodative and will always be vigilant,” Rajan said after the policy announcement. The RBI has lowered the repo rate—the rate at which the central bank lends to commercial banks—by 125 basis points this year, which includes a higher-than-expected rate cut of 50 basis points in its previous policy meeting in September.

The RBI kept economic growth projection unchanged at 7.4 percent for FY2016. India’s GDP grew 7.4 percent during the July-September quarter this year, government data showed on Monday.

Responding to a query on growth projections and its decision not to lower rates this month, Rajan said: “The RBI is not against growth, we will ensure sustainable and the maximum growth that we can get. This would be within the inflation levels we are willing to accept.”

Economists expect the RBI to start cutting rates soon. “We expect more rate cuts, around 50 basis points more, by mid-2016,” said Siddhartha Sanyal, chief India economist with Barclays. Shubhada Rao, chief economist at Yes Bank said the RBI remains “dovish”, expecting more rate cuts as inflation eases.

Rajan reiterated his hope that Indian banks will clean up their balance sheets [of bad loans] by March 2017. The RBI has introduced several regulations and powers to boost governance at the boards of banks. Massive recapitalisation of state-owned banks from the government is awaited, which will help them to start lending more as economic growth picks up.