MUMBAI (Reuters) - India's central bank kept its key repo lending rate unchanged at 6.75 percent on Tuesday, as widely expected, after consumer inflation picked up to a four-month high and as emerging markets brace for a hike in U.S. interest rates.
Reserve Bank of India (RBI) Governor Raghuram Rajan left open the door for more easing, noting weak rural and global demand was holding back economic growth, while highlighting pockets of weakness in sectors such as construction.
COMMENTARY
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI:
"Today's policy move is largely in shape with the expectations. The tone for further easing is neutral and would largely be based upon the coordinated effort in improving the fiscal path and food management policy, while ensuring the disinflationary path is a clear priority.
"The sensitivity of commodity prices with respect to geo-political tensions, demand side inflationary pressure resulting from implementation of pay commission proposals and to certain extent the tone of U.S Fed in the upcoming meeting with other key data inflows would weigh on the central bank's forthcoming rate agenda."
KUNAL SHAH, FUND MANAGER, DEBT, KOTAK LIFE INSURANCE, MUMBAI:
"The RBI is keeping a lot of hope that the government will manage the fiscal deficit even after implementing the pay commission's recommendations. I think it is a well balanced policy on upside and downside inflation risks going ahead. It is less hawkish than what the market was expecting."
MAHENDRA JAJOO, FIXED INCOME FUND MANAGER AT MJ INVESTMENT SERVICES, MUMBAI:
"The governor is still maintaining an accommodative stance, he is saying as and when room opens up there can be more rate cuts, so that's a positive for the markets. He did say that the fed action can create volatile knee-jerk reaction, but beyond that there will be no impact.
"At the margin, food prices and pay commission may have some impact but the government has found enough compensatory areas to save and lower the fiscal deficit. I am fairly confident that the combination of the current government and Rajan will ensure that markets remain in good shape. I think there's room for another rate cut after the budget next year."
ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI:
"This policy is a bit of a non-event, in line with majority expectations. But going forward the risk is compound, and the risks point to a very cautious approach to accommodation. This is a cautious policy. The rate cuts have been front-loaded. Unless there is commitment of fiscal consolidation in the budget and a clear sort of path visible for the pay commission and its effect, I don't think the RBI is likely to move. I think we will have to wait until after the budget for any move, if at all."
R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS ASSET MANAGEMENT, MUMBAI:
"There has been a mix of data that has come in the last couple of months which includes some hardening of food prices, which RBI is concerned about, and the pay commission - the full effect of which will only be seen over a period of time. These of course are causes of concerns, although not causes of worry yet - it's too early to take that call.
"The path of fiscal consolidation will be very, very important in determining how many rate cuts you get next year. Assuming the government sticks to its earlier fiscal consolidation plan, we have a sense that in the next year you will get more rate cuts.
"Obviously Fed this month is expected to hike, therefore it makes sense for RBI to pause. But over a period of time it's very conformable for RBI to have a very divergent policy. We have seen in the past that Fed has been ultra accommodative while the Reserve Bank has been hiking in 2013-14. So there have been periods of time when there is substantial divergence in the Fed and RBI policy so we do not expect RBI to follow the Fed in any way. Of course if the there's some volatility as a result of the Fed actions, we expect to ride that out."
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI:
"The policy statement was along expected lines. We still think RBI will be on hold in the next policy also and await fiscal stance and inflation outturn to decide on further accommodation. In any case we think that inflation has bottomed out at 5 percent and thus space for further easing is limited to 25 bps."
BACKGROUND
* India's central bank is likely to keep its policy rate unchanged, following a big cut two months ago, and to sound cautious about the scope for more easing as it aims to meet its 2017 inflation target and braces for a U.S. rate hike.
* India will allow offshore insurance companies, pension funds and sovereign wealth funds to lend to local companies for the long term, the central bank said, easing rules for offshore borrowing.
* India's economic growth picked up in July-September, outpacing China on improving domestic demand and manufacturing activity, and the acceleration could persuade the country's central bank to keep interest rates unchanged.
* India's fiscal deficit reached 4.11 trillion rupees ($61.67 billion) during April-October or 74 percent of the full-year target, government data showed.
* India's central bank is allowing foreign investors to buy corporate bonds that are either totally or partly in default, it said, a potential boost to the country's nascent distressed debt market.
* India's merchandise exports shrank 17.53 percent in October from a year ago to $21.35 billion, government data showed, on weak global demand.
* India's wholesale prices dropped for a 12th straight month in October, falling an annual 3.81 percent mainly due to easing fuel prices, government data showed.
* Rising prices for some food products and firm demand during the festival season pushed up India's retail inflation to a four-month high in October, making it less likely the central bank will cut interest rates at its policy review.
* India's annual industrial output grew at a slower-than-expected pace of 3.6 percent in September, dampened by a slower expansion in the mining sector, government data showed.
* India has eased foreign direct investment norms in 15 major sectors, including mining, defence, civil aviation and broadcasting, the government said, in a bid to drum up investment and speed growth.
* India's services industry expanded at its fastest pace in eight months in October as new business rose with discounting probably stoking demand, a survey showed.
(Reporting by Mumbai Treasury Desk; Editing by Sumeet Chatterjee)
