MUMBAI (Reuters) - The Reserve Bank of India (RBI) kept its policy rate on hold at 6.75 percent on Tuesday, as widely expected, opting to wait until after the government's annual budget statement at the end February to decide on whether to cut interest rates further.
Almost all of the 39 economists polled by Reuters had expected the Reserve Bank of India to keep interest rates on hold on Tuesday.
The central bank cut the repo rate by 125 basis points in 2015, including by a bigger-than-expected 50 bps in September. It held rates at its last meeting in December.
COMMENTARY
R SIVAKUMAR, HEAD OF FIXED INCOME, AXIS ASSET MANAGEMENT, MUMBAI:
"Clearly they are watching out for the budget to the extent that if the fiscal situation remains tight we will see more rate cuts to support growth, but if the government elects to support growth through fiscal spending then the quantum of rate cuts will be limited.
"There is uncertainty around inflation next year due to the pay commission, they have alluded to that. In the near term CPI will remain elevated because of the way the CPI is calculated, therefore RBI will wait for more data to see the one-off effect of the pay commission before they can form a medium term view of the trajectory of inflation.
"There is the realization that with low commodity prices rate cuts continue globally, whether it's Japan or China. So the fact is that rate cuts are the order of the day and there is realization that eventually India too will need to cut rates. It's a matter of timing and they believe they have time on their hands."
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI:
"The policy was along expected lines. We continue to expect a residual 25 BPS cut in repo rate in April, assuming the government sticks to its fiscal roadmap."
RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCE HOLDINGS, MUMBAI:
"Given the flexible inflation targeting framework that we have formally adopted, I don't see any scope for rate reduction beyond 25 bps which may happen around budget time only after the RBI is convinced about the fiscal consolidation roadmap of the government. It may happen outside the policy also if the RBI feels the government has stuck to its fiscal deficit target, just to endorse the action.
"The RBI cannot take contradictory measures by not reducing repo rate and then infusing liquidity. Liquidity tightness has happened due to mismatch between demand and supply."
BACKGROUND
* RBI Governor Raghuram Rajan warned on Friday that straying from fiscal consolidation and easing up on the fight against inflation would jeorpardise the country's economic stability at a time of global market turmoil.
* Finance Minister Arun Jaitley would get away with letting his borrowing targets slip when he presents his annual budget next month, according to the overwhelming majority of economists in a Reuters poll.
* The government is due to deliver its 2016/17 budget on Feb. 29 along with plans on how it intends to stagger a 24 percent increase in salaries and pensions for some 10 million current and former government employees.
* Annual industrial output contracted in November, its worst performance in more than four years, while retail inflation picked up, complicating RBI's task of steering monetary policy at a time of international deflation.
* Merchandise exports fell for the 13th successive month in December, as orders from the United States and Europe shrank and exporters grappled with a competitively weaker Chinese yuan.
(Reporting by Mumbai Treasury Desk; Editing by Sumeet Chatterjee)
