India's Central Bank, Wary on Inflation, Set to Keep Rates on Hold

India's Central Bank, Wary on Inflation, Set to Keep Rates on Hold

India's central bank held interest rates at a seven-year low on Wednesday, citing concerns over inflation and rising oil prices as a reason not to make a further cut.

The RBI's course will likely be determined by inflation, which in October it projected would accelerate to 4.2 to 4.6 percent in the six months to March, driven by multiple factors including planned pay hikes for government employees.

The six member monetary policy committee (MPC) today, chaired by RBI governor Urjit Patel, chose to maintain the status quo by 5:1.

In addition, the consumer price index (CPI), or retail, inflation for October rose to 3.58 per cent from 3.28 per cent in September.

The policy review observed that the moderation in inflation, excluding food and fuel, that was witnessed in first quarter of 2017-18 has "by and large, reversed". There is a risk that this upward trajectory may continue in the near-term.

I think the message to the market is clear that for a central bank, which is mandated to target inflation, when inflation is rising they will be probably taking pre-emptive actions and when inflation is falling they will be probably taking reactive action. RBI expects inflation to be in the range of 4.2-4.6% in the second half of the current fiscal year.

In this scenario, it stressed, any adverse shock due to geo-political developments could push up prices even further.

All but two of 54 analysts in a Reuters Poll had expected the repo rate would be left unchanged at 6 per cent, the lowest since November 2010.

The RBI also revised its inflation projections for the coming months marginally. The rate at which banks borrow money from the RBI by selling their surplus government securities to the central bank is known as "Repo Rate".

The bank had lowered the rate by 25 basis points at its meeting in August. 42 of 48 economists in a Bloomberg survey had also expected the repo rate to be kept steady. We maintain our call that the RBI will be on a pause in the near term.