Asia Markets

India's Central Bank Holds Interest Rates Steady, Says Growth Needs to Be ‘Self-Sustaining'

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  • The Reserve Bank of India's monetary policy committee voted to keep the repo rate — or the rate at which the central bank lends to commercial lenders — unchanged at 4%.
  • India's growth "will have to be assiduously nurtured by conducive policy settings till it takes root and becomes self-sustaining," the central bank said in its policy statement.
  • The Indian rupee moved slightly following the monetary policy decision, changing hands at 75.44 Indian rupees per dollar.

India's central bank kept interest rates unchanged on Wednesday in a widely expected move.

The Reserve Bank of India's monetary policy committee voted to keep the repo rate — the rate at which the central bank lends to commercial lenders — unchanged at 4%. The committee agreed to retain the RBI's accommodative policy stance for as long as necessary to revive and sustain India's growth momentum, while keeping inflation within target.

The RBI's reverse repo rate, or the rate at which commercial banks lend to the central bank, remained unchanged at 3.35%.

"The domestic recovery is gaining traction, but activity is just about catching up with pre-pandemic levels and will have to be assiduously nurtured by conducive policy settings till it takes root and becomes self-sustaining," the central bank said in its policy statement.

Private consumption remains below pre-pandemic levels, while demand for contact-heavy services could be affected if India takes pre-emptive steps to contain the fallout of the new omicron Covid variant, the statement said.

The Indian rupee moved slightly following the monetary policy committee's decision. It changed hands at 75.50 Indian rupees per dollar as of 4:19 p.m. HK/SIN.

"The overarching tone of today's statement and forward guidance is less hawkish than what we had anticipated," said Aditi Nayar, chief economist at credit ratings agency ICRA, the Indian affiliate of Moody's.

"With the MPC remarking that the ongoing domestic recovery needs sustained policy support to make it more broad-based, we now foresee a slightly lower likelihood of our base case assessment that the stance will be changed to neutral in the February 2022 policy review," she said in a note.

Inflation and growth outlook

India's annual retail inflation rose to 4.48% in October, compared to 4.35% a month earlier, according to government data.

The flare-up in vegetable prices as a result of heavy rains in October and November is likely to reverse when winter arrives, the Indian central bank said. Proactive government intervention has kept higher global crude oil prices from being added to the domestic retail inflation, it added.

"Crude prices have seen a significant correction in recent period. Cost-push pressures from high industrial raw material prices, transportation costs, and global logistics and supply chain bottlenecks continue to impinge on core inflation," the RBI said.

The central bank expects retail inflation at 5.3% for the current fiscal year that ends in March 2022 and at 5% for the April-June quarter next year. The RBI's medium-term inflation target is 4%, within a band ranging from 2% to 6%.

The central bank kept its growth projection for the current fiscal year unchanged at 9.5% — based on the assumption that India avoids a resurgence in Covid cases. For the April-June quarter next year, the RBI expects India's economy to grow by 17.2%.

India reported 8.4% year-on-year growth from July to September, in line with expectations.

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