India central bank keeps rates on hold, sees room for more ‘accommodation’

India’s central bank kept its key repo lending rate unchanged at 6.75 percent on Tuesday, as widely expected, after consumer inflation picked up to a four-month high and as emerging markets brace for a hike in U.S. interest rates.

Reserve Bank of India (RBI) Governor Raghuram Rajan left open the door for more easing, noting weak rural and global demand was holding back economic growth, while highlighting pockets of weakness in sectors such as construction.

But Rajan said further rate cuts would be dependent on inflation and external developments, while reiterating his call for banks to lower their lending rates to reflect the steep easing undertaken by the RBI this year.

Specifically, the RBI governor added that the focus of monetary policy would shift towards achieving a consumer inflation target of 5 percent by March 2017, even as he noted risks to inflation remained “slightly to the downside” by March next year.

“The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 percent by March 2017,” Rajan said in his statement.

The 10-year government bond yield IN077225G=CC rose 2 basis points to 7.77 percent from levels before the RBI decision, while the broader NSE index .NSEI rose 0.4 percent. The rupee INR=D2 was broadly unchanged.

All 45 respondents surveyed by Reuters last week had expected the RBI would keep the repo rate INREPO=ECI unchanged after consumer inflation INCPI=ECI edged up to a four-month high of 5.0 percent in October.

That is comfortably below the RBI’s target of 6 percent for January. But achieving his March 2017 objective may prove more difficult for a country that less than two years ago suffered double-digit inflation.

PROLONGED COMMODITY SLUMP

The RBI has lowered the repo rate by 125 basis points this year. That includes a larger-than-expected 50 bps cut at its last policy review in late September, as inflation has eased thanks in large measure to a prolonged slump in commodity prices.

Easing inflation has allowed the RBI to focus on supporting economic growth. Data on Monday showed the economy grew 7.4 percent in the July-September quarter, faster than China, but below the government’s goal of 8.0 to 8.5 percent annual growth.

However, a recent pay hike for government employees and potential food price shocks are causing renewed concern about inflation.

Meanwhile, the Federal Reserve is widely expected to raise U.S. rates in December for the first time in nearly a decade.

Although India has outperformed other emerging markets over the past two years, the country is not immune to Fed-related worries.

The rupee fell to a two-year low last week and was the worst performer in emerging in Asia in November, as foreign investors sold $1.5 billion in bonds and stocks.

Source: Reuters