India unexpectedly leaves key interest rates unchanged

India’s central bank signalled that its interest-rate easing cycle is coming to an end after unexpectedly leaving borrowing costs unchanged for a second straight meeting while citing sticky inflation.

The benchmark repurchase rate was left at a six-year-low of 6.25 per cent, the Reserve Bank of India (RBI) said in a statement in Mumbai on Wednesday. The move was predicted by just five of 39 economists in a Bloomberg survey, while the rest saw a cut to 6 per cent. 

“The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out,” the RBI said.

Several analysts were counting on lower borrowing costs to revive an economy hit by Prime Minister Narendra Modi’s unprecedented cash ban. India joins Russia’s central bank, which this month also held interest rates after the Federal Reserve said inflation will rise to its target even with "gradual" rate increases.

Six members voted in favour of the monetary policy decision. Inflation is projected in the range of 4 per cent to 4.5 per cent in the first half of the financial year and in the range of 4.5 per cent to 5 per cent in the second half with risks evenly balanced around this projected path.

Gross value added (GVA) growth for 2016-17 is projected at 6.9 per cent with risks evenly balanced around it. GVA growth for 2017-18 is projected at 7.4 per cent, with risks evenly balanced

Governor Urjit Patel’s decision to refrain from a cut risks frustrating Modi, who faces five state elections over February and March. Growth in gross domestic product may slow to 6.5 per cent in the year through March from 7.9 per cent the previous year as Modi’s cash clampdown hurts demand.

The government’s pledge to keep narrowing Asia’s widest budget deficit had spurred hopes for monetary easing as had inflation, which is below the 4 per cent midpoint of the RBI’s target range.

However, a surge in deposits following the cash ban offers commercial lenders room to lower their rates. Economists including Sonal Varma at Nomura Holdings predict a sharp economic recovery June-December as cash in the system increases.

A growth recovery may reassure foreign investors, who’ve been net sellers of Indian bonds in the four months to January and kept the rupee among Asia’s worst performers.

Source :Times Of Oman