India’s RBI keeps lending rates steady
December 1, 2015, 8:49 am

Rajan is encouraged by GDP growth but opted not to cut repo rates as inflation rises and the world awaits a US Fed decision on its interest rates [Xinhua]

The RBI interest rates have already been cut four times in the past 12 months; in December 2014 it stood at 8 per cent.

There had been pressure for the RBI to cut the repo rate in the wake of a continuing slump in India’s manufacturing sector, which grew at its weakest pace in over two years in November as demand and output continued to soften.

But Tuesday’s RBI announcement comes as the consumer price index (CPI) registers an uptick in inflation to 5 per cent for October, below the 6 per cent level projected by the bank for October and November, but slightly higher than the central bank’s 2017 target of 5 per cent.

“Consumer confidence was, however, supported by the diminishing slack in the labour market,” said the RBI’s Fifth Bi-monthly Monetary Policy Statement for 2015-2016.

The CPI is one of the RBI’s key determinant factors when deciding monetary policy. The RBI expects inflation to continue rising in December.

Inflation in recent months has slightly outpaced market forecasts.

“Inflation has turned up as anticipated, and is expected to rise further until December before plateauing. The uptick of…inflation…for two months in succession warrants vigilance,” RBI Governor Raghuram Rajan said in a statement published by local media.

“Households’ inflation expectations remain elevated although they have edged lower recently, perhaps in response to lower prices of petrol and diesel. Rural wage growth, as also corporate staff costs, remain subdued,” Rajan also said in his statement.

But India’s economy, which is the fastest growing in the world at 7.4 per cent, is also wary of the effects of expected US Federal Reserve rate hikes later this month.

As the US economy delivers more positive data, and with China appearing to have somewhat steadied from the summer meltdown, there is growing momentum that the Fed will tighten its monetary policy and raise interest rates, albeit at a snail’s pace.

Analysts believe that Rajan is unlikely to make any significant changes to monetary policy now, rather keeping an eye on what the Federal Reserve does during its last meeting of the year later in December.

Meanwhile, the rupee currency gained against the dollar and at press time came in at 66.518 to the greenback.

The BRICS Post with inputs from Agencies