India’s RBI holds rates; signals tight policy on inflation worries

The Reserve Bank of India kept its key lending rate steady for a fourth consecutive policy meeting on Friday, as widely expected, but signalled it would keep rates high and liquidity tight to bring inflation closer to its 4% target.

India’s benchmark bond yield jumped the most in 14 months on the central bank’s tough stance on inflation and its surprise comments that it was considering bond sales to sop up any excess funds in the financial system.

The country’s monetary policy committee (MPC) kept the repo rate unchanged at 6.50%, in a unanimous decision. Most economists polled by Reuters had expected it to keep rates steady.

It has raised rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.

“Monetary policy needs to remain actively disinflationary at the current juncture,” RBI Governor Shaktikanta Das told a press conference.

The RBI also maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of economic growth.

A move to a neutral policy stance can only be considered when inflation aligns with the target in a “durable” manner, Das said. Five of six committee members voted in favour of the stance.

The impact of past rate hikes is still to be fully felt across the economy, Das said.

Annual retail inflation eased to 6.83% in August, from a 15-month high of 7.44% in July, but remained well above the central bank’s 2%-6% comfort band. However, core inflation, excluding food and oil, dropped below 5%.

Sharp spikes in food prices have been the main driver of headline inflation as erratic weather hurts production of staples like vegetables, milk and cereals.

“While declining core inflation is a silver lining, the overall inflation outlook remains clouded,” said Das, citing the impact of patchy rains and volatile global food and energy prices.

The central bank kept its inflation forecast unchanged and sees it averaging 5.4% in the financial year 2023-24. It also kept its economic growth projection unchanged at 6.5% for the year, despite signs of slowing global growth.

“The good part is that growth remains resilient and core inflation remains under check,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities in Mumbai.

“We maintain our call for a prolonged pause on repo rate at 6.5% well into fiscal year 2024/25 while liquidity over the medium term will be aimed at being close to neutral.” The central bank sees inflation falling to its 4% target only by the second quarter of next financial year, it said in a separate report published alongside the monetary policy review.

“I would like to emphatically reiterate that our inflation target is 4% and not 2-6%. Our aim is to align inflation to the target on a durable basis, while supporting growth,” Das said High inflation has put the focus back on liquidity management amid the RBI’s reduced ability to keep hiking rates at the risk of hurting growth.

The central bank may consider open market sales of bonds via auctions to manage liquidity conditions in line with its inflation objectives, Das said, but added the regulator does not intend to provide a timeframe for such sales yet.

India’s banking system liquidity has been in deficit but could improve as government spending has yet to pick-up.

The 10-year benchmark bond yield jumped to its highest level in six months, after Das said the RBI could consider open market sales of bonds. The benchmark 2033 bond yield jumped to 7.3412%, against 7.2197% before the policy decision.

The Indian rupee weakened marginally following the decision, and was at 83.2350 to the US dollar, while local shares also remained higher with the benchmark BSE index up 0.40%.

Median forecasts in a recent Reuters poll showed analysts expect the RBI to keep the repo rate at 6.5% for the rest of this fiscal year, with the next move being a 25 bps cut before July.

But Das’ comments on Friday on price risks indicated there is a significant risk that the RBI delays any loosening of monetary policy into the middle of next year, said Capital Economics in a note.

“That would be a lot later than many other emerging market central banks.”

Separately, Indian steel companies plan to raise prices of various grades of the alloy due to rising import costs of coking coal, especially from major producer Australia, officials at four domestic mills said.

Steel mills are likely to raise rates by $25 to $50 a metric ton by December, said the officials, who did not wish to be named as they are not authorised to speak to media.

Prices for Australian coking coal have jumped 50% to over $350 a metric ton due to factors such as maintenance outages, lower than usual supplies from Queensland, and a slower train network, Banmeet Khurmi, a metallurgical coal analyst at London-based CRU, a commodity-focused research group, said.