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India cenbank keeps rates on hold to support economic recovery

The Reserve Bank of India’s monetary policy committee kept interest rates steady at record lows on Friday, as widely expected, but traders are awaiting its comments about inflation and liquidity normalisation for further clues on the outlook.

RBI’s key lending rate or the repo rate INREPO=ECI was held steady at 4% while the reverse repo rate INRREP=ECI or the borrowing rate also stayed unchanged at 3.35%.

All 60 economists polled by Reuters had said they expected no change in the repo or reverse rates, which have been kept steady since May last year.

“We derive comfort from the fact that the inflation trajectory is turning out to be more favourable than anticipated,” Governor Shaktikanta Das said in a speech after the policy decision.

“In spite of global headwinds, we hope to emerge from the storm and sail towards normal times steered by the underlying resilience of the macroeconomic fundamentals of the Indian economy,” he said.

Economists polled by Reuters this week said India’s economic recovery from pandemic-related shutdowns is at risk of a further delay in the second half of this fiscal year. They expected inflation to remain elevated or accelerate, not fall.

The country’s coronavirus vaccination pace has gathered momentum and greenshoots are visible in various sectors but consumer spending during the upcoming festival season will be crucial in determining the sustainability of the revival.

By 0437 GMT, the NSE Nifty 50 index .NSEI was up 0.61% at 17898.85 and the benchmark S&P BSE Sensex .BSESN was up 0.60% at 60037.17. The country’s benchmark 10-year bond yield IN10YT=RR fell to 6.28% after the decision, while the Indian rupee INR=IN was at 75.15 against the dollar.

After recent variable rate reverse repo auction cut-off yields were set at levels sharply above 3.35%, traders are expecting the reverse repo rate to be raised sooner rather than later and will await any clues on the timing from the speech.

Market participants are also keen to know if the central bank is looking at advancing its exit from extraordinary liquidity support due to rising inflationary pressures, or if it continues to think those forces are transitory.

RBI has slashed the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow from the health crisis and tough containment measures. This follows 135 bps worth of rate cuts since the beginning of 2019.
Source: Reuters (Reporting by Swati Bhat and Abhirup Roy; Editing by Kim Coghill)

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