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India Central Bank Signals No Rush to Cut Interest Rates

(Bloomberg) -- India’s central bank stuck to its hawkish policy stance on Thursday as inflation remains well above its target, suggesting it’s in no hurry to cut interest rates until later in the year.

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The Monetary Policy Committee voted five-to-one to keep the benchmark repurchase rate at 6.5%, a move predicted by all of the 42 economists in a Bloomberg survey. The panel also decided to retain its policy stance at “withdrawal of accommodation,” disappointing some analysts who had predicted a shift to neutral.

“The job is not yet finished, and we need to be vigilant about new supply shocks that may undo the progress made so far,” Governor Shaktikanta Das said in a live-streamed address from Mumbai. Monetary policy transmission remains incomplete, he said, implying banks haven’t fully passed on the RBI’s rate hikes to customers, while inflation still remains above the target.

Indian bonds reversed early gains with 10-year yields climbing two basis points to 7.09%, while the rupee traded flat and stocks edged lower.

Inflation is well above the central bank’s 4% goal, largely because of surging food costs. The core measure, which strips out food and fuel costs, has eased below that level, though, suggesting demand-led pressures remain subdued. Warmer-than-normal temperatures across large parts of the country are likely to hurt crops and keep prices higher.

What Bloomberg Economics Says

The Reserve Bank of India’s decision to maintain its hawkish stance ignores developments since its December review that pointed to the need for a dovish shift. The longer the RBI puts off a pivot, the greater the risk it undermines growth.

— Abhishek Gupta, India economist

For the full report, click here

Das provided new forecasts for the coming fiscal year beginning in April, projecting inflation will average 4.5%, while the economy will grow 7%. Those were in line with previous forecasts he outlined in Davos in January. He said at the time that it was premature to talk about rate cuts until there’s evidence inflation will be kept firmly around the target level.

The Reserve Bank of India will likely take its cue from the US Federal Reserve, which remains wary of cutting rates too soon. Four Fed officials on Wednesday made comments suggesting they don’t see an urgent case to lower rates.

“We do not see RBI preceding the Fed in rate cuts,” Madhavi Arora, an economist at Emkay Global Financial Services Ltd, wrote in a note. Any change in the policy stance may happen at the April meeting or later, she said.

In the absence of any rate action, traders have focused on the RBI’s liquidity operations, another way the central bank can influence market interest rates. The RBI recently conducted a spate of auctions aimed at removing liquidity, after injecting cash in previous months.

Das said Thursday the RBI will remain “nimble and flexible” on liquidity and that an appropriate mix of instruments will be used to adjust banking-system cash.

Paytm Action

Das and his fellow MPC members spent a considerable part of the press briefing Thursday fielding questions about the fintech giant Paytm, which has been targeted by the RBI after persistent non-compliance and supervisory concerns at its banking unit.

The regulator has prohibited Paytm Payments Bank from taking on new customers and fresh deposits after Feb. 29, and said it’s at risk of losing its license.

Deputy Governor Swaminathan Janakiraman said Thursday the RBI’s action follows years of talks between the regulator and the company. Officials said the central bank will ensure any inconvenience to customers is minimized and the Paytm app won’t be impacted.

Das added that the regulator doesn’t want to stifle innovation in the fintech industry.

--With assistance from Kartik Goyal and Shwetha Sunil.

(Updates with comments about Paytm)

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