India Dispatch: India's central bank kept interest rates on hold yesterday as it works to prevent the rupee from weakening further.
Interest rates unchanged in India
India's central bank kept interest rates on hold yesterday as it works to prevent the rupee from weakening further.
The Reserve Bank of India (RBI) also said it would roll back the emergency liquidity tightening steps it took two weeks ago once stability returns to the currency market.
The Indian rupee had tumbled to a record low of more than 61 against the dollar earlier this month before the RBI stepped in to defend the currency.
The rupee's decline was triggered by comments from the United States Federal Reserve that suggested it would scale back quantitative easing, resulting in a capital flight from emerging markets. Industry leaders are keen for the central bank to reduce borrowing costs to help to boost India's slowing economy, but lower interest rates would be detrimental for the fragile currency.
"The RBI is trying to balance multiple concerns: maintaining external stability, containing inflation and supporting growth," said Leif Eskesen, HSBC's chief economist for India and Asean. "At the moment, it is more focused on external stability, which leaves it with no room to ease the monetary policy stance and forces it to keep a tighter rein on liquidity to stem undue pressures on the currency."
The RBI kept the policy repo rate at 7.25 per cent. Bond markets reacted positively to the rate decision, while the rupee dropped below 60 against the dollar compared with an opening rate of 59.6.
The RBI yesterday lowered its forecast for India's GDP growth in the current financial year from 5.7 per cent to 5.5 per cent.
"As regards economic activity, risks to growth have increased notwithstanding the robust onset and spread of the monsoon," said D Subbarao, the governor of the central bank. "Industrial production has slumped. Meanwhile, depressed global conditions are undermining export performance. Wholesale price inflation pressures are on the ebb, but retail inflation remains high."
Economic growth in India last year slowed to a decade low of 5 per cent.
Crisil Research also lowered its growth forecasts for the country yesterday, to 5.5 per cent from 6 per cent, citing the reduced likelihood of an interest rate cut in the remainder of the financial year, which runs until the end of March.
"As a result, there is less likelihood of a decline in lending rates during the year," Crisil said. "This will be true even if the monetary tightening measures undertaken recently are reversed. Monetary policy is hence unlikely to bolster growth this year."