RBI Sticks to Easy Money Policy as US Tapers Easement

Falling Inflation Helps

India’s central bank left its key interest rate unchanged as consumer-price inflation eased to a two-year low and the rupee strengthened, increasing scope to support growth ahead of national elections starting this month.

Governor Raghuram Rajan kept the repurchase rate at 8 percent, the Reserve Bank of India said in a statement on 1 April. He has boosted the rate by 75 basis points since taking office in September.

Rajan’s move breaks with counterparts in Russia and Brazil, who increased rates as the withdrawal of U.S. stimulus and tensions over Ukraine threaten to trigger outflows. Further tightening isn’t anticipated if Indian consumer-price inflation remains on a path to hit 8 percent in January 2015 and 6 percent a year later, the central bank said on 1 April.

India’s consumer-price inflation remains the fastest among 18 Asia-Pacific countries even after easing in February to 8.1 percent, the slowest pace since January 2012.

Rupee Gain

The rupee has gained about 3 percent this year, the best performance in Asia after Indonesia’s rupiah.

The U.S. Fed last month further trimmed its bond-buying program by $10 billion to $55 billion as the world’s largest economy recovers, while Russia raised its main rate the most since 1998 as investors withdrew money on concern President Vladimir Putin will invade Ukraine. Brazil has raised rates by 75 basis points this year, most recently on Feb. 26.

Rajan said steps are being taken to allow foreign investors to protect themselves from market-price swings. Market regulators are finalizing terms allowing foreign investors to hedge currency risks by using exchange-traded futures and considering a proposal to permit them to hedge debt-coupon receipts due in the next 12 months, according to RBI statement of 1 April.

A sharper-than-expected drop in vegetable prices led to a “sizable fall” in headline inflation, while gains in prices of items excluding fuel and food remained flat, the Reserve Bank said. A weak monsoon, uncertainty over guaranteed agriculture prices and geopolitical developments are among risks to the central bank’s inflation forecast, it said.

“The Reserve Bank’s policy stance will be firmly focused on keeping the economy on a disinflationary glide path,” it said. Gross domestic product can grow between 5 percent and 6 percent in the fiscal year beginning, it said.

RBI Objective

Asia’s third-biggest economy grew 4.9 percent in the year ended on 31 March, according to official forecasts, compared with a decade-low of 4.5 percent the previous year. An RBI survey predicted it grew 4.7 percent last fiscal year and would expand 5.5 percent in the year starting on 1 April.

Indian Finance Minister Palaniappan Chidambaram last month said the central bank’s board mostly agreed that the objective of monetary policy should be both price stability and economic growth. A central bank panel had recommended making inflation “the predominant objective” of monetary policy and called for a 4 percent target with a band of plus or minus two percentage points by 2016.

Rajan said several of the panel’s recommendations had already been implemented, including the adoption of CPI as a policy anchor and “explicit recognition of the glide path for disinflation.” The RBI reduced the amount banks could borrow overnight while offsetting it with greater access to borrowing for seven and 14 days “to improve the transmission of policy impulses across the interest rate spectrum,” it said.

Subdued growth, rising vegetable prices and graft scandals have put the Congress party’s decade-long rule in jeopardy. The main opposition Bharatiya Janata Party will win the most seats in elections starting April 7 while falling short of a majority, opinion polls show. Results will be announced May 16.

Chidambaram defended the government’s record, saying his “biggest success” was containing the fiscal deficit at 4.6 percent of GDP in the financial year ended on 31 March.

Economists from Barclays Plc and ICICI Bank Ltd. say the rupee could depreciate if the national polls don’t produce a clear winner. The currency has rebounded 15 percent from a record low in August, as the government curbed gold imports to narrow the current-account deficit and Rajan offered discounted swaps for dollars raised by banks.

If the polls don’t offer a clear mandate to either party, the rupee could drop to 68 per dollar from 59.8900 now, Societe Generale SA predicted on March 24.