The Reserve Bank of India (RBI) left its key interest rate unchanged for a second meeting and retained its tightening stance, signalling rate-setters want to see inflation moderate further while weaker monsoon risks remain a concern.
 
A six-member monetary policy committee (MPC) voted unanimously to keep the benchmark repurchase rate at 6.5%. All 40 economists in a Bloomberg survey predicted the hold.  

The panel decided 5:1 to retain the policy stance focused on “withdrawal of accommodation,” which was introduced April last year. Thirteen of the 18 economists who shared their forecast on the stance expected the move.  

“Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain,” governor Shaktikanta Das said in a livestreamed address from Mumbai on Thursday (June 8). 

“The continuation of the stance of withdrawal of accommodation should be seen from this perspective,” he added. 

Indian equities headed for fresh all-time closing highs as foreign funds piled into the market and supported by an extended pause on interest rates. Bonds edged lower, with the yield on 10-year security rising by two basis points to 7%, while the rupee was steady.

India joins most global central banks on pausing on rate hikes as commodity prices ease and policymakers are starting to signal their tightening cycle has concluded. At the same time, surprise rate hikes in Australia and Canada this week underscore the stickiness of inflation worldwide. The US Federal Reserve may pause its aggressive tightening cycle when it meets next week while Bank Indonesia kept its benchmark rate unchanged for a fourth meeting.

“There is very little sense of any shift in RBI’s policy thinking today (June 8), as the resilient growth and falling inflation provides a lot of degrees of freedom, from a policy perspective,” said Rahul Bajoria, economist at Barclays plc. 

Economists surveyed in a Bloomberg survey saw India’s May’s inflation pace slowing 4.39%, a 20-month low when data is released next week. The RBI wants to see inflation settle near the mid-point of its 2-6% range. Inflation in March and April fell within the upper limit of the target. 

“Headline inflation still remains above the target and being within the tolerance band is not enough,” Das said, while trimming the RBI’s inflation forecast to 5.1% from 5.2%. “It is always the last leg of the journey which is the toughest,” he added.  

The rate-setters will now train their focus on the progress of monsoons and the likely occurrence of El Nino this year, which dries up crops and tightens food supplies. The weather office has maintained its forecast for normal rainfall though the arrival has been delayed. 

“The vigilance on inflation has been reiterated, indicating that the MPC is not ready to lower its guard on prices despite recent positive surprises, said Anubhuti Sahay, the Mumbai-based South Asia chief economist at Standard Chartered plc. 

The central bank retained a 6.5% growth target in the current fiscal year, indicating it wants to preserve the trajectory of India’s booming economy even as rising inequality is squeezing consumer spending. The latest quarterly growth figures blew past estimates, bringing India’s economic expansion to 7.2% and making the South Asian country one of the fastest growing regions in the world.  

Das said the central bank will remain nimble in its liquidity management. The RBI intensified its operations to remove cash from the banking system in recent weeks, draining about 1.5 trillion rupees this month alone. 

The central bank’s efforts to remove short-term funds from the system comes amid a jump in deposits with banks after the withdrawal of high-value currency notes and a dividend payout by the RBI to the government.
 

  - Bloomberg