Rajan Holds Rates with Eye on Budget After Unscheduled Cut

Indian central bank Governor Raghuram Rajan left interest rates unchanged three weeks after an unscheduled cut, signaling that he wants to see Prime Minister Narendra Modi’s first full-year budget before easing further.

Rajan kept the benchmark repurchase rate at 7.75 percent, the Reserve Bank of India said in a statement in Mumbai on Tuesday.

Rajan is among at least ten central bankers from Canada to Turkey who have cut rates this year as plunging oil prices lead to slowing inflation. Now he’s watching to see if Modi delivers on promises to narrow the fiscal deficit and boost investment in Asia’s third-biggest economy when his government unveils its budget on Feb. 28 when it may fall to even 7.25 percent. The next rate cut is expected immediately after the budget announcement.

The RBI further lowered the proportion of deposits that must be invested in specified securities such as government bonds to 21.5 percent from 22 percent to create space for banks to expand credit. The measure, called the Statutory Liquidity Ratio, is unlikely to have an immediate impact as banks are holding more than the mandated level due to low loan demand.

The government plans to raise 584 billion rupees ($9.4 billion) through auctioning minority stakes in companies involved in oil to power equipment. Last week it completed its biggest asset sale to date, earning at least $3.6 billion from selling shares in monopoly miner Coal India Ltd.

Investment Falls in India

India is the only big emerging market to see total investment as a percentage of the economy fall over the past decade, according to data from the International Monetary Fund. It declined to 32 percent of GDP last year, compared with a six-percentage-point rise to 48 percent in China.

Morgan Stanley economists see Rajan lowering the benchmark interest rate to 6.5 percent by year’s end to spur corporate capital expenditure, known as capex, which includes improvements such as fixing a roof, opening a factory or buying computers.