RBI Opens Door For Rate Cut Early Next Year

NDTV Profit Desk

02 Dec 2014, 03:56 PM IST

A file photo of RBI Governor Raghuram Rajan

Mumbai: The Reserve Bank of India (RBI) held interest rates steady as widely expected at a policy review on Tuesday, and said it could ease monetary policy early next year provided inflationary pressures do not reappear and the government controls the fiscal deficit.

Uneasy over India's weak recovery from its slowest phase of growth since the 1980s, the six-month-old government had been seen as favouring an early reduction in rates, but RBI Governor Raghuram Rajan said containing inflation was a prerequisite.

"What again and again we have seen in India, and outside India also, is that the way to sustainable growth is to have moderate inflation," Rajan told a news conference. (Read: What Raghuram Rajan Said at RBI Policy's Meet Today)

Forty-one of 45 economists polled by Reuters had forecast that the RBI would keep the repo rate at 8.00 per cent, while four had expected a reduction of 25 basis points.

The RBI's next policy review is in early February, and most analysts had expected the central bank would either cut interest rates then or wait until April.

"A change in the monetary policy stance at the current juncture is premature," the RBI said in its statement.

"However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle." (Read: RBI Chief Says Don't Intend to Flip-Flop on Policy)

India's benchmark 10-year bond yield fell 5 basis points on the day to 8.01 percent as investors cheered the central bank's more dovish stance.

Economy needs more than rate cut

In its statement, the RBI spoke of the need to revive capital investment, and called on the government, which will announce its budget in February, to "stay on course" to meet fiscal deficit targets. Those targets have been jeopardised by weak tax revenue growth and the slow pace in selling off stakes in state-run companies to raise funds.

Data released on Friday showed economic growth slipped to 5.3 per cent year-on-year in the July-September quarter, down from 5.7 per cent in the previous quarter. India needs far faster growth to create jobs for all the young people joining its workforce in coming years.

"Things will not pick up just because of rate cuts," said J. Venkatesan, an equity fund manager for Sundaram Asset Management in Chennai. "A strong reforms push is needed to revive economic growth. That is where the cycle had got stuck."

Helped by tumbling oil prices, India's annual consumer price inflation (CPI) slowed to 5.52 percent in October, sharply down from a peak of 11.16 per cent struck in November last year, but the RBI warned that it expected inflation to rise in December as a favourable base effect wanes.

The RBI has targeted CPI at 6 per cent for January 2016, and the central bank said risks to the target "appear evenly balanced under the current policy stance."

Dr Rajan said if that target was achieved the RBI would then aim for a longer term inflation target of 4 percent.

While there were few expectations that the RBI would cut interest rates this time, officials had told Reuters last week that Finance Minister Arun Jaitley would press Rajan for a reduction when they held a customary meeting before the policy review - though there was no confirmation that meetng took place.

The central bank is not statutorily independent from the finance ministry, but it enjoys broad autonomy in setting monetary policy, though there are plans to amend the RBI Act and incorporate a monetary policy committee that gives voting rights to officials both within and outside the central bank.