Reserve Bank leaves policy rate unchanged for a ninth time

The Reserve Bank of India’s (RBI’s) rate-setting monetary policy committee (MPC) on Thursday maintained status quo on interest rates and opted to retain its “withdrawal of accommodation” stance.

Four of the six MPC members voted to keep the benchmark repurchase rate at 6.5% for the ninth time, while the other two sought a quarter-point cut.

Giving the rationale for the MPC’s move, governor Shaktikanta Das said RBI “has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.”

The monetary policy panel’s four-year term ends in October. The next policy meeting, scheduled for 9 October, will be key as it will be the first under a newly constituted MPC. The terms of three external MPC members—two of whom had backed rate cuts—will end before the next policy meeting.

In June, inflation had risen to 5.08%, above the Reserve Bank of India’s 4% goal, driven by food prices that constitute almost half of the consumer price basket.

The central bank kept its growth projection for the full fiscal unchanged at 7.2% from its June projection but slightly moderated its growth projection for the April-to-June quarter after considering the updated information on specific high-frequency indicators that showed lower than anticipated corporate profitability, general government expenditure, and core industries output.

The retail inflation forecast for the fiscal of 4.5% was also kept unchanged from the 49th monetary policy meeting held in June this year.

Benchmark indices Nifty and Sensex closed about 0.74% down from the previous day’s closing on Thursday.

Bonds declined on RBI’s hawkish stance on inflation, while the rupee was little changed. One basis point is one-hundredth of a percentage point.

“The MPC judged that it is important for monetary policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof,” Das said.

“Resilient and steady growth in GDP enables monetary policy to focus unambiguously on inflation. It must continue to be disinflationary and resolute in its commitment to aligning inflation to the target of 4 % on a durable basis. Accordingly, the MPC decided to keep the policy repo rate unchanged at 6.5% in this meeting,” he added.

Bond curbs

Meanwhile, the Reserve Bank played down worries over some curbs that it had recently imposed on foreign ownership of bonds eligible for inclusion in a global index.

About ₹41 trillion (close to $490 billion) worth of bonds are available to foreigners, and they own only ₹2 trillion of it, RBI deputy governor Michael Patra said in a press conference.

India had last week imposed curbs on foreign ownership of some recently issued bonds in a move that signaled regulatory caution.

Freshly issued government bonds with 14-year and 30-year tenors will no longer be fully accessible to non-resident investors, RBI had said.

Some 90% of foreign investments in the so-called Fully Accessible Route, or FAR, bonds are in 5- to 10-year maturities, while it’s just 2% in the total stock of the 30-year bonds, Patra said.

“Our hope is that concentrating them in this 5- to 10-year segment will actually make it more liquid and better price discovery will occur and transaction cost will fall as the depth increases,” he added.

The central bank has also advised lenders to lure more household financial savings via innovative products and service offerings and by leveraging their vast branch network.

Most lenders had posted weak deposit growth in the quarter to June, which fell behind the growth in credit demand.

The concerns come as people are increasingly funneling their money from bank deposit accounts to investment products.