Reserve Bank of India Governor Raghuram Rajan left interest rates unchanged at his last policy review as food prices threaten to push inflation above the nation’s target.
The benchmark repurchase rate is to remain at a five-year low of 6.5 percent, the central bank said in a statement in Mumbai, India, yesterday.
The move was predicted by 27 of 29 economists in a Bloomberg survey, while two expected a cut to 6.25 percent.
While good monsoon rains, a pay increase for government employees and the accommodative monetary stance will spur growth, “risks to the inflation target of 5 percent for March 2017 continue to be on the upside,” the statement read. “It is appropriate for the Reserve Bank to keep the policy repo rate unchanged at this juncture, while awaiting space for policy action.”
Since surprising India by announcing a return to academia when his term ends on Sept. 4, Rajan has urged his yet-to-be-named successor to continue the fight against one of Asia’s highest inflation rates.
The next governor will need to assess whether the revival of the monsoon has created space for India to follow nations like Malaysia and Australia in monetary easing as risks to the global economy mount.
“India is close to the end of the rate cut cycle,” Jay Shankar, an economist with Religare Securities Ltd, wrote in a note on Monday.
Shankar saw room for one more 0.25-percentage-point cut in the year through March next year, while “any further space to cut rates would be a function of further disinflation.”
While the central bank might look through the direct statistical effect of higher house rent allowances for state employees, its impact on inflationary expectations will be carefully monitored, the statement said, adding that the stance of monetary policy remains accommodative and will continue to emphasize the adequate provision of liquidity.
Gross value added projections for the year through March remained at 7.6 percent, with risks evenly balanced, the statement said.
Although consumer inflation touched a 22-month high in June, reports of above-average rains in the annual June-to-September monsoon season might provide some relief — particularly after the first back-to-back droughts in almost three decades.
At the same time, higher pay for civil servants and a planned national sales tax threaten India’s inflation goals. Rajan is targeting 5 percent in March next year and 4 percent a year later, plus or minus 2 percent.
“If the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may continue to trend upwards and counterbalance the benefits of the expected easing of food inflation,” the RBI said.
Indian Prime Minister Narendra Modi’s government last week cemented Rajan’s inflation target in law through 2021. A rate setting panel is to follow soon, completing the biggest overhaul of the 81-year-old central bank.
Modi has less than four weeks to pick a successor for Rajan, who announced his exit almost two months ago following criticism of his policy decisions by a key ally of the prime minister.
During his three years in office, Rajan has boosted foreign exchange reserves to a record, stabilized the rupee and pressured banks to begin cleaning up US$120 billion of souring loans.
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