India Monetary Policy June 2017


India: Central Bank holds policy rate despite softer inflation

June 7, 2017

The Reserve Bank of India (RBI) decided to keep monetary policy unchanged at a scheduled meeting on 6-7 June and held the repo rate at 6.25%—a multi-year low. Five out of six members of the monetary policy committee voted to keep the rate unchanged. Accordingly, the marginal standing facility rate (Bank Rate) was held at 6.50% and the reverse repurchase rate at 6.00%.

The unchanged stance comes amid the RBI’s cautious outlook on price pressures despite lower-than-expected inflation in April. The Bank emphasized that it is uncertain if lower inflation will be sustained and highlighted balanced risks to the outlook, stating that “premature action at this stage risks disruptive policy reversals later and the loss of credibility”. Accordingly, the RBI held its policy rate unchanged but lowered its inflation projection and now sees inflation of 2.0% to 3.5% in H1 FY 2017 before rising to 3.5% to 4.5% in H2. The Bank also revised its growth forecast for the Indian economy down a notch to 7.3% for FY 2017 following the release of GDP data for FY 2016. While the economy is seen recovering from the demonetization shock and government spending is expected to support activity this year, political risks may materialize and twin balance sheet issues are holding back the Bank’s outlook.

Overall, the Bank struck an even tone and any changes in the monetary policy stance will likely be data driven and depend on policy evolution. A majority of FocusEconomics analysts see the Bank remaining on hold this year against a backdrop of rising U.S. interest rates. Commenting on Nomura’s forecasts, Sonal Varma, Chief India Economist remarks:

“We expect it to stay on hold through 2017. Because of likely lower headline inflation prints in the next two months, we would assign a 40% chance to a rate cut in August, but our base case is on hold. We are pushing out our call of a cumulative 50bp in rate hikes to H2 2018 (vs Q2 and Q3 earlier).”

The next monetary policy meeting is scheduled for 1-2 August.

Our Consensus Forecast is that the repurchase rate will average 6.21% at the end of FY 2017. For FY 2018, panelists see the repurchase rate ending the year at 6.29%.

Author: Angela Bouzanis, Senior Economist

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