India: Central Bank stays put, flags possible inflation risks
June 17, 2013
At its 17 June monetary policy meeting, the Reserve Bank of India (RBI) left the repurchase rate unchanged at 7.25%, in a decision broadly in line with market expectations. In addition, the RBI maintained the cash reserve ratio at 4.00%. The Bank's decision to keep the repo rate unaltered in this meeting follows three consecutive 25 basis-point rate cuts in January, March and May, as the Central Bank aims at rekindling faltering economic growth.
In its statement, the Central Bank argued that global economic activity has weakened more than previously expected. On the domestic front, the Bank acknowledged that "macroeconomic conditions remain weak", mainly against a backdrop of infrastructure bottlenecks, supply constraints and subdued domestic demand. Regarding price developments, monetary officials pointed out that inflation has moderated as expected. However, monetary officials underlined that inflationary pressures are likely to appear in the coming months, primarily as a result of the recent depreciation of the Indian rupee, an increase in administered prices and persistent imbalances, especially regarding food supply.
Monetary officials emphasized that the monetary policy stance "will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead", while they acknowledged that "a durable receding of inflation [...] will open up the space for monetary policy to continue to address risks to growth".
A majority of Consensus Forecast panellists expect the RBI to ease the reins in the months ahead, resulting in a repo rate of 7.35% for June 2013. Panellists see the Bank lowering rates further next year to 7.06% by the end of fiscal year 2013/14.
Author: Ricardo Aceves, Senior Economist