India Dispatch: India's central bank left interest rates unchanged yesterday amid concerns about inflationary risks from a soft rupee and high food prices.
India holds the line on interest rates
India's central bank left interest rates unchanged yesterday amid concerns about inflationary risks from a soft rupee and high food prices.
The benchmark repo rate remains at 7.25 per cent following three rate successive cuts this year.
"Inflation has moderated as projected," the Reserve Bank of India (RBI) said in a statement. "However, upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects."
The decision to keep rates on hold was widely anticipated, but business leaders have been hoping for further rate cuts to help boost India's faltering economy, with growth slowing to a decade low in the past financial year.
"Global economic activity has slowed and risks remain elevated," the RBI said.
"On the domestic front, macroeconomic conditions remain weak, hamstrung by infrastructure bottlenecks, supply constraints, lacklustre domestic demand and subdued investment sentiment."
The rupee plunged to a record low, just under 59 against the United States dollar, last week. Softness in the Indian currency makes imports more expensive and fuels inflation. Cutting interest rates would be likely to further weaken the rupee, while the country is struggling with a gaping trade deficit.
"Admittedly, wholesale price inflation has now been below 5 per cent for two months and GDP growth remains weak," said Aninda Mitra, the India economist at Capital Economics.
"But consumer price inflation is still high, at 9.3 per cent year on year, and the inflation outlook more generally won't have been helped by the recent fall in the rupee," Mr Mitra added. "What's more, a rate cut now would have weakened India's ability to attract the capital it needs to finance its current account deficit - now running at an annual rate of about 5 per cent of GDP - at a time when investor sentiment has anyway been turning against the emerging world."
India is actively trying to attract more foreign investment to help boost its economy.
"We now think these factors will keep the RBI on hold for several months," said Mr Mitra. "We expect only one more 25 basis points rate cut in 2013, toward the end of the year."
The central bank said that cuts would depend on easing inflation levels.
"The Reserve Bank's monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead," it said. "It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth."
V K Sharma, the managing director and chief executive of LIC Housing Finance, said that the rate cuts made earlier this year have already helped to boost sentiment among homebuyers and he was hoping for further cuts.
"There is a feelgood factor in the customers," said Mr Sharma. "Those who were deferring their buying decisions have started purchasing."