Rajan looks for room to cut interest rates, sees inflation pressures | Reuters - Firstpost
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Rajan looks for room to cut interest rates, sees inflation pressures | Reuters

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MUMBAI The Reserve Bank of India is looking for room to reduce interest rates further, but there are concerns over upward pressures on food and commodity prices, Governor Raghuram Rajan said after leaving rates unchanged at a policy review on Tuesday.

Aside from uncertainty over the timing of any rate move, investors in India are also concerned whether Rajan, a much admired former International Monetary Fund chief economist, will be given an extension when his term expires in September.

Rajan gave nothing away, telling reporters: "You will know when there is news."

Reuters reported last week he was likely to be offered another two years, should he want it, but markets were spooked after a regional newspaper cited sources close to Rajan saying he could walk away.

The decision to hold the repo rate steady at a five-year low of 6.50 percent was widely expected, with the central bank needing to see whether monsoon rains would dampen food price rises, after inflation accelerated to a stronger-than-expected 5.39 percent in April.

Rajan's policy statement struck a more cautious tone than it had done at the last policy review in April, but it said the RBI's stance would remain "accommodative".

Graphic: Indian Economy -- reut.rs/1ZtSDhk

Speaking to a news conference after the review, the central bank chief made clear that he wanted to able to lower interest rates, having already brought them down by 150 basis points since January 2015, including a 25 bps reduction in April.

"We're looking for room to ease," Rajan said.

Apart from needing a good monsoon, Rajan's statement said inflation risks could also be offset by astute management of stocks by the government, and by companies increasing supply capacity.

The statement said the RBI saw "an upward bias" to its previous projections of consumer inflation of around 5 percent during the year started in April.

The RBI has targeted inflation of around 5 percent by March 2017 and 4 percent over the medium term.

Growth of 7.9 percent in the March quarter cemented India's ranking as the world's fastest growing large economy, yet it needs even faster growth to create jobs for millions of youngsters joining the workforce.

The RBI said it would projected economic growth of 7.6 percent for 2016/17 - using a different measure from the official gross domestic product data - and described upside and downside risks as evenly balanced.

"AT LEAST ONE MORE"

The RBI cited several uncertainties regarding price trends, including a rebound in oil prices, the implementation of a pay hike for millions of government employees and pensioners, households' rising inflation expectations, and sticky core inflation.

"The statement is couched in many conditions. I think to see the policy as hawkish is a bit premature," said Abheek Barua, chief economist of HDFC Bank in New Delhi. "There is room for at least one rate cut until December."

All but one of 44 economists polled by Reuters last week had expected the RBI to leave the rate unchanged this time.

But most had expected a possible final cut in the current easing cycle sometime between July and September, so long as food prices were kept in check.

After the policy decisions were announced the broader NSE share index rose 0.4 percent, while the rupee strengthened to 66.85 per dollar from Monday's close at 66.96. The benchmark 10-year bond yield rose 1 bp to 7.48 percent from its previous close.

Meantime, Rajan repeated a pledge to ensure the financial system had adequate liquidity, and reiterated his call for banks to pass on benefits of earlier RBI rate cuts to borrowers, as they have only lowered lending rates by 65 bps since early 2015.

(Editing by Simon Cameron-Moore)

This story has not been edited by Firstpost staff and is generated by auto-feed.

First Published On : Jun 7, 2016 23:15 IST

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