India's Central Banks Leaves Main Interest Rate Unchanged

By Gabriele Parussini 

        MUMBAI--The Reserve Bank of India left its main interest rate unchanged Tuesday, as contradictory data failed to provide a clear picture of the health of Asia's third-largest economy.
        RBI Governor Raghuram Rajan said he is still waiting for banks to pass on to customers the three interest-rate cuts he has made since the start of the year, and noted that the inflation forecast for India has somewhat worsened.
        "It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy," Mr. Rajan said in a written statement.
        Eleven analysts polled by The Wall Street Journal before the rate decision had unanimously predicted Mr. Rajan would keep the repurchase-agreement rate unchanged at 7.25%.
        Monsoon rainfall, which has a large impact on India's food production, is back to normal after a few below-par weeks from the end of June through the start of July, easing inflation concerns.
        But other indicators fail to paint an unambiguous outlook for India's growth story. Some--including rising non-oil and non-gold imports and accelerating vehicles sales--point to stronger demand, while others--such as weak corporate earnings--suggest growth is still soft, despite official GDP figures indicating otherwise.
        "There's a lot of uncertainty" in the economy, said Pranjul Bhandari, an economist with HSBC in Mumbai said last week. "We see the RBI reiterating its data-dependent stance."
        Mr. Rajan noted in his remarks Tuesday that the RBI will have a sounder ground to make rate decisions when many of the uncertainties are cleared.
        "Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions," Mr. Rajan said.
        Many of the economists interviewed said that the RBI has more room to cut rates by a quarter percentage point before next April. But most are convinced that India's central bank will wait to see previous policy moves percolate through the banking system before taking further steps.
        Mr. Rajan seemed to agree.
        He said: "As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation."
        Helped by a sharp fall in inflation on the back of plummeting global commodity prices, the RBI has cut rates three times since the start of the year by a total of 0.75 percentage points. But banks--cautious over the high level of nonperforming assets on their balance sheets--have been slow to pass on the cuts to their customers.
        The international environment is adding to the complexity.
        Federal Reserve Chairwoman Janet Yellen recently indicated that she is inclined to raise U.S. interest rates soon and proceed with the increases slowly. That suggests that the Fed's liftoff may start in September, an event which will increase the returns in dollar-denominated assets and spur capital outflows from emerging economies, like India. In anticipation, investors have in recent weeks withdrawn record amounts from Asia's equity markets.
        In anticipation of a U.S. rate rise, currencies in the Asia Pacific region have lost ground against the dollar, with many of them hitting fresh multiyear lows against the dollar. The pressure has even reached India's rupee, which had held up against the dollar so far this year. The Indian currency has fallen 0.5% against the dollar since the start of July.
        Write to Gabriele Parussini at gabriele.parussini@wsj.com
        (END) Dow Jones Newswires
        August 04, 2015 01:53 ET (05:53 GMT)

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