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India’s federal bank holds rates, eyes inflation and rebounding growth

Published: December 6, 2017

STORY: The Reserve Bank of India kept its policy rate steady at 6 percent on Wednesday (December 06), as widely expected, after inflation accelerated to a seven-month high and stronger economic growth reduced the need for monetary stimulus.

Five members of the Monetary Policy Committee (MPC) voted to keep rates unchanged, while one voted for a 25 basis point (bp) cut. The RBI also kept the reverse repo rate unchanged at 5.75 percent.

The decision to stand pat was widely expected after the annual rate of consumer inflation increased in October to 3.58 percent, driven by higher food and crude oil prices. That’s still low by Indian standards, but not far from the central bank’s 4 percent target. Nonetheless, the RBI left its policy stance “neutral” while slightly softening its language on inflation by saying risks were “evenly balanced”.

Government officials have been calling on the RBI to cut rates given the economy, though recovering from July’s bumpy launch of a national sales tax, is not yet growing fast enough to create the jobs needed for India’s young workforce.

Indian bond prices have slumped in recent weeks as investors sharply pared expectations for rate cuts. The central bank took advantage of an extraordinary period of low inflation, including a slump in food and energy prices, to cut rates by a total of 200 bps from January 2015 until August this year, when it last cut the repo by 25 bps.

But those factors are now reversing, with crude prices rallying and food prices expected to climb further. Moreover, a growing number of global central banks, including most recently South Korea’s, are tightening policy, with the U.S. Federal Reserve expected to hike rates again next week.

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