India: RBI keeps key policy rate unchanged
December 18, 2013
At its 18 December monetary policy meeting, the Reserve Bank of India (RBI) decided to maintain the repurchase rate unchanged at 7.75%. The decision was a surprise to most market analysts who had expected the Central Bank to raise interest rates to 8.00%. In addition, the RBI decided to keep the cash reserve ratio (CRR) unchanged at 4.00%.
According to the RBI's statement, the recovery in the global economy continues, albeit at moderate pace. Meanwhile, growth in India improved in the second quarter of FY 2013/2014. GDP increased 4.8% annually in the July-September period (Q1: +4.4% year-on-year); it was buttressed by strong growth in agriculture. However, the Bank pointed out that growth in industrial activity remains weak and that leading indicators suggest, "continuing headwinds to growth." Regarding price developments, the Central Bank recognized that both WPI inflation and CPI inflation remain elevated, which is mainly due to higher food prices. Consequently, the Bank evaluated that the currently elevated food prices will be transitory and, in fact, it expects retail prices to ease in the coming months. The Central Bank added that the normalization of exceptional monetary measures have improved liquidity conditions, which also reflects the stabilization of the foreign exchange rate.
The RBI concluded that the monetary policy decision reflects the uncertainty surrounding the near-term path of inflation from its currently-high levels and the weak state of the economy. Consequently, monetary authorities stated that, "there is merit in waiting for more data to reduce uncertainty."
The majority of FocusEconomics Forecast panelists have taken the recent developments into account. As a result, forecasters project that the repurchase rate will average 7.87% at the end of fiscal year 2013/2014. For fiscal 2014/2015, panelists see the repurchase rate ending at 7.58%.
Author: Ricardo Aceves, Senior Economist