MUMBAI (Reuters) - The RBI kept interest rates unchanged as expected on Monday after cutting them in each of its previous three policy reviews, warning of upward risks to inflation posed by a falling rupee and increases in food prices.
The Reserve Bank of India also called for vigilance over global economic uncertainty, citing the risks of a reversal of capital flows from emerging markets. Such outflows would exacerbate the country's high current account deficit.
The repo rate remains at 7.25 percent and the cash reserve ratio (CRR), or the share of deposits banks must keep with the central bank, stays at 4.00 percent, despite falling inflation in recent months.
COMMENTARY
RADHIKA RAO, ECONOMIST, DBS, SINGAPORE
"The RBI stuck to script and maintained its caution stance on inflation and external imbalances. Pertinently, the recent bout of rupee depreciation could act as a fresh catalyst to inflationary pressures, along with reviving financing concerns on narrower rate differentials.
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"Looking ahead, the central bank might also start factoring in potential reversal in the fiscal consolidation efforts, which in turn could renew inflation risks and aggravate the twin deficits.
"As anticipated, the improvement in liquidity conditions in recent weeks has lowered the urgency to push with a CRR reduction. Room for repo cuts are limited going forward and we maintain that another 25 basis points cut is on the cards, at best."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
"The RBI continues to remain very hawkish. It has clearly said external sector imbalance has been weighing on its decision. And this is the key message that maximum weightage will be given to external sector position going forward.
"At this stage, the RBI didn't have much room to do any action despite accentuated risks to growth. But I am not expecting action in July because I think after the monsoon is over, the RBI will make an assessment of monsoon, its normalcy and impact on food prices. I expect action on rates only in the second half of the year."
SURESH KUMAR RAMANATHAN, HEAD OF REGIONAL INTEREST RATES AND FX STRATEGY,
CIMB, KUALA LUMPUR
"The RBI was slightly hawkish but with the INR under pressure to weaken, the tone was appropriate. Bottomline, an ease or dovish stance would have hurt the INR tremendously, so some saving grace for INR from a hawkish stance by RBI. As long the INR is under pressure, RBI will hesitate to ease anytime soon."
ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED, MUMBAI
"The guidance is not as hawkish as the market was fearing. RBI has left room wide open for rate cuts but it will remain heavily data dependent like how inflation and the current account deficit pans out."
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
"We feel the probability of 25 basis points repo cut remain towards the July policy meet, considering the progress on monsoon, easing inflation in the near term and the need to address the investment sentiment.
"However, the rupee stability and measures to stabilize the foreign inflows in the interim would be crucial for the RBI to be pro-active."
MOSES HARDING, HEAD OF ASSET-LIABILITY MANAGEMENT, INDUSIND BANK, MUMBAI
"It was prudent decision of RBI to pause on rates and not delivering CRR cut is good for bonds keeping option of primary liquidity infusion through OMOs (open market operations).
"The tone is mildly hawkish as RBI has pulled in balance of payment into the radar along with growth and inflation for policy decisions given the FII (foreign institutional investment) risk in play.
"There is no reason to cut rates given the strong external headwinds exerting pressure on the rupee. Weak rupee can play havoc on inflation and fiscal deficit when inflation is showing signs of easing."
ANJALI VERMA, ECONOMIST, PHILLIPCAPITAL, MUMBAI
"I still expect 25-50 basis points of repo rate easing in the rest of the financial year. The timing will be based on the currency movement as it will have an impact on inflation and the current account deficit. Capital inflows are also an important variable the RBI will watch out for."
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI
"I still think there is a possibility of a rate cut in July based on inflation views and on expectation that the currency markets will stabilise post the FOMC meeting this week. But if the volatility continues and the rupee continues to weaken, then we will review the call.
However, the risks of no action in July have increased going by the statement from the RBI.
But if the current trajectory of CPI continues, there could be one more rate cut going forward."
MARKET REACTION
The rupee held onto its losses, while stocks edged lower and interest rate swaps rose after the RBI announcement.
The main stocks index <.BSESN> was down 0.2 percent, while the 10-year bond yield was up 2 basis points (bps) at 7.33 percent from its previous close. The five-year swap rate was up 4 bps at 7.01 percent from its Friday close.
The rupee was trading at 57.81/82 per dollar as of 0542 GMT, weaker than its 57.5150/5250 close on Friday after briefly falling to as much as 57.90 after the RBI decision.
LINKS
For the India Online special page on the RBI policy review, click https://bsmedia.business-standard.comin.reuters.com/subjects/rbi-policy-review
BACKGROUND
- A slump in the rupee to record lows and the risk of potentially destabilising capital inflows have complicated the task for the central bank to loosen policy despite softening inflation and a decade-low economic growth.
- Finance Minister P. Chidambaram pledged last week new reform measures by the end of June including lifting caps on foreign direct investment and changes in locally-produced gas prices to win back investor confidence. The rupee slumped to a record low of 58.98 per dollar this week, adding to concerns about the prospects of a recovery in Asia's third largest economy.
- Industrial output in April grew 2.3 percent from an upwardly revised 3.4 percent in March, while the wholesale price index in May rose an annual 4.7 percent, the lowest in more than three years.
- Annual consumer price inflation slowed for the third straight month in May to 9.31 percent, but it was higher than market expectations and a weaker rupee could accelerate price pressures especially because India relies heavily on crude oil imports.
(Reporting by Treasury, Markets, Companies teams; Editing by Ranjit Gangadharan)