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May 28, 2017

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India central bank seen holding rates steady

MUMBAI--India's hawkish central bank was widely expected to keep interest rates unchanged Tuesday at its first monetary policy-setting meeting since new pro-growth prime minister Narendra Modi took office.

Business leaders have called for lower borrowing costs to spur an economy which expanded by 4.7 percent last year — the lowest level in nearly a decade, and half the rate seen during India's boom years.

But, with consumer inflation nudging 10 percent and fears that a weak monsoon could push food prices higher, the Reserve Bank of India (RBI) has scant scope to loosen monetary policy, economists say.

The Association of Chambers of Commerce and Industry of India (Assocham) said the central bank might cut rates by a "symbolic" 25-basis points, but economists disagreed.

"The RBI has no choice but to remain vigilant on inflation," said Frederic Neumann, co-head of Asian Economic Research at HSBC.

Economists widely expect the central bank to keep its trend-setting repo rate — at which the RBI lends to commercial banks — on hold at eight percent at Tuesday's policy meeting.

"I strongly feel the central bank will hold rates steady," said Bank of Baroda chief economist Rupa Rege Nitsure.

Analysts say the central bank's strong anti-inflation policies may clash with Modi's aim of reviving the economy

Central bank chief Raghuram Rajan, a former International Monetary Fund chief economist, has hiked interest rates three times since taking the helm last September.

Rajan has set a goal of achieving "low and stable inflation" in order to achieve what he calls "sustainable growth."

Modi swept to victory last month, ousting the left-leaning Congress, and he faces huge public expectations to live up to election promises of "better days ahead."

The Indian economy's sub-five-percent growth for two straight years represents the country's "worst economic slowdown since 1985," said Deepak Lalwani, head of India-focused consultancy Lalcap.

"The RBI and the government may not be on the same page," said Anjali Verma, an economist at financial services firm PhillipCapital.

Some experts have suggested Rajan could be under threat from Modi's Bharatiya Janata Party government, with the bank governor coming in for criticism from the party before the election for keeping rates high.

But, at a conference in Tokyo last week, Rajan denied any discord with the government.

There is "often a tendency to try and find a wedge between the two and widen the wedge," he said.

The RBI governor's policies have been widely credited with helping to narrow India's current account deficit — the widest measure of trade — and restoring the rupee's stability after the currency slid.

"Rajan is well respected through the global investor community ... He has enough credentials to just walk away from the current situation," said Rajiv Biswas, chief Asia economist for global consultancy IHS.

"The government needs to give him enough leeway to continue."

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