x Abu Dhabi, UAEWednesday 26 July 2017

Reserve Bank of India springs surprise on interest rates

Central bank holds interest rates steady, a move likely to be welcomed by Indian expatriates with mortgages and other loans back in their home country.

A worker cleans the stairs of the Reserve Bank of India (RBI) building in Kolkata. REUTERS/Rupak De Chowdhuri
A worker cleans the stairs of the Reserve Bank of India (RBI) building in Kolkata. REUTERS/Rupak De Chowdhuri

India’s central bank sprang a surprise yesterday by holding interest rates steady, a move likely to be welcomed by Indian expatriates with mortgages and other loans back in their home country.

Many observers had expected the Reserve Bank of India (RBI) to follow the trend of its past two policy meetings and raise the repurchase rate by a quarter of a percentage rate.

But in its quarterly review of monetary policy, the central bank opted to keep the benchmark rate, the short-term lending rate that banks rely on for their financing, at 7.75 per cent. The inaction reflected RBI’s desire to support the fragile economic recovery.

“This is positive for any expatriate who has taken any kind of loan in India as the interest rate will not go up and in the near term the rupee will be comparatively stable,” said Promoth Manghat, the vice president of global operations at UAE Exchange, a money transfer and foreign exchange company headquartered in Abu Dhabi.

“We were expecting the interest rate to be hiked as inflationary data and industrial production data has not been encouraging and the US Federal Reserve’s tapering [of its monetary stimulus] is also on the horizon.”

News of the decision sent the rupee up to 62.1163 against the US dollar. India’s stock market benchmark index, the S&P Sensex rose 1.3 per cent, ending a six-day retreat.

Recent rises in interest rates by the RBI have been aimed at helping to tame rampant inflation. Increases in food inflation fanned consumer prices to an annual rate of 11.24 per cent last month. Wholesale price inflation, the benchmark measure of inflation, quickened to an annual rate of 7.5 per cent.

In its statement, the central bank acknowledged that “current inflation is too high”.

But for now it seems the faltering economy remains its more immediate worry. Industrial production shrank for the first time in four months in October, government data showed last week.

“Given that the economic recovery is still very fragile, the central bank is likely to remain patient with inflation,” wrote Miguel Chance, India economist, at Capital Economics, in a research note yesterday.

“Overall, we think the rate hiking cycle is probably over and that there will be scope for easing to start in late 2014.”

The rupee has swung wildly this year as the RBI has tried to stimulate economic growth while supporting the domestic currency. It hit a historic low of 68.84 in August as concerns about India’s wide current account deficit were exacerbated by expectations of a winding down of the Fed’s stimulus programme.

The rupee’s weakness sparked a surge in remittances from Indian expatriates in the UAE and elsewhere.

“When the rupee was very low some people went beyond their earnings and borrowed to send money home,” said Mr Manghat. “With expectations of more stability in the currency in the short term, people will be able to plan their savings and remittances and pay off any debts they may have.”

tarnold@thenational.ae