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The RBI left interest rates and the cash reserve ratio for banks unchanged on Monday, defying widespread expectations for a rate cut as it warned that doing so could worsen inflation, disappointing markets.
The Reserve Bank of India kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent.
"Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," the RBI wrote in its mid-quarter policy review.
Economists polled by Reuters had forecast a rate cut, most likely of 25 basis points.
LEIF ESKESEN, CHIEF ECONOMIST FOR INDIA AND ASEAN, HSBC,
"It was the right decision from the Reserve Bank of India's perspective because a significant portion of the slowdown in growth is because of supply constraints, and a cut in monetary policy rates or even the cash reserve ratio is not going to make much impact on growth.
"In addition to that, inflation remains high and there are risks when it comes to the inflation outlook. Any easing by the RBI will depend on what happens on the global front and to domestic inflation."
JONATHAN CAVENAGH, SENIOR FX STRATEGIST, WESTPAC, SINGAPORE
"The RBI obviously feels that inflation pressures remain too strong to ease policy further from here. It's a delicate balancing act though, as growth momentum is poor and policy remains too restrictive in our view, particularly given the weaker international backdrop.
"In any event near-term risks are INR to underperform the broader risk on move throughout the region. Risks are for USD/INR to pop back above 56.00 level in terms of the 1 month NDF. Should still be good selling resistance at 56.50 though."
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI
"This policy is consistent with the April statement. Unless the government takes steps on fiscal adjustment, the RBI is not prepared to cut rates. Based on this document, there's unlikely to be a rate cut in July. The timing then shifts to September, but then we live in an uncertain world. Things can change, there will be domestic data and we need to look at global developments. If there is a demand shock globally, the RBI will be prepared to respond.
"There's hope that once the presidential election is over, and there is reshuffle at the finance ministry, the government may take some action on reforms, and on subsidies. But, the July policy of the RBI may come a little early before the government can take steps. But, we need to see if something positive happens from the government."
RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS, SINGAPORE
"The growth weakness is such that it does call for monetary easing. We still expect RBI to ease rates by 100 basis points in the year. At this point it looks that in July, the RBI could cut the repo rate by 25 basis points or even higher. The core inflation is weak, but the headline inflation has to go up as a result of fiscal adjustment."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
"The RBI has taken a very cautious stance and has given a signal that it would like to wait for some more data points on inflation and growth to decide which of the two constitutes to a more serious threat.
"A lot of contradictions in high frequency databases of India have made the RBI's job quite though."
KUMAR RACHAPUDI, FIXED INCOME STRATEGIST, BARCLAYS CAPITAL, SINGAPORE
"The RBI clearly surprised the market by not cutting either CRR or the repo rates. However, we do think that the RBI has changed tack on liquidity, i.e. it is now willing to provide more liquidity comfort to banks than before.
"For instance, the RBI did increase the limit of export credit refinance from 15 percent of outstanding export credit to 50 percent -- this, according to the RBI is an additional injection of liquidity amounting to 300 billion rupees or approximately 50 bps of CRR cut. The RBI also maintained that management of liquidity remains priority and it will continue to use OMOs (open market operations) as and when warranted to contain pressures.
"We think that this upmove in OIS yields gives us a chance to receive rates."
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
"The recent inflation readings have provided fair degree of discomfort and in terms of fiscal adjustment, steps are yet to be taken by the government. And, the RBI may want to keep its powder dry for future course of actions, in case there is resurgent stress in the euro zone. The front-loading of 50-basis-points cut in April was showing that growth momentum will be addressed.
"Future rate action would be contingent on concrete steps being taken by the government and the inflation trajectory. We are still looking at 25-50 basis points in the rest of the year."
SURESH KUMAR RAMANATHAN, FIXED INCOME AND FX STRATEGIST, CIMB, KUALA LUMPUR
"As we expected they kept rates unchanged, the key here is inflation and a cut would have exacerbated the outflow of funds. INR should remain stable to firm on the back of today's decision. We see the risk of OIS rates moving higher as receivers are squeezed."
INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI
"This is a fair judgment on the part of the RBI to say that interest rates alone will not affect the overall economy. It is very difficult to say how the economic issue will pan out. We still stick to our outlook of another 50 bps cut over the course of the year."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
"The Reserve Bank of India's action is clearly disappointing. Inflation remains a concern, but the slowing growth needed at least a 50-basis-point rate cut. The RBI will have to ease sooner or later, otherwise there will be further challenges to growth.
"It can cut the cash reserve ratio even before the next policy. The decision will depend on the liquidity tightness."
Bond prices and stocks dropped and the rupee weakened against the dollar after the decision surprised markets that had been expecting the central bank to loosen policy.
The benchmark 10-year bond yield rose 9 basis points to 8.43 percent from beforehand while the new 10-year bond yield rose about 7 basis points.
The main BSE index erased gains to fall 0.6 percent from before the decision.
The rupee weakened to 55.53 per dollar from around 55.35 before the RBI move.
- India's economy has been slowing sharply due to a combination of factors such as high borrowing costs, government inaction on key policies and sluggish global environment.
- Standard & Poor's said last week that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
- Industrial output rose just 0.1 percent in April, lower than expectations in a Reuters poll for a 1.7 percent increase. Output fell in March from a year earlier by 3.5 percent.
- Economic growth slowed to 5.3 percent in the March quarter, its weakest pace in nine years and sharply off 9.2 percent rise in the year-earlier period.
- Price pressures remain high with the wholesale price inflation accelerating to 7.55 percent in May from a year earlier, driven by double-digit rises in food and fuel prices.
- The Reserve Bank of India cut policy rates in April for the first time in three years, by 50 basis points, after raising them 13 times from March 2010 to last October.