As expected the Reserve Bank of India (RBI) left rates unchanged
at 5.75%, with concerns over both slowing growth and rising
inflation present. There seems little chance of further easing
this year. Schroders' Emerging Markets Economist, Craig Botham
comments:
"In a briefing after the decision was announced,
central bank governor Urjit Patel expressed concern about the
loss of economic momentum and the weakness in manufacturing. Some
of this weakness is believed to be linked to the Goods and
Services Tax (GST), which Patel hopes may be resolved in the
second half of the fiscal year. In line with these concerns, the
RBI cut its fiscal year growth forecast from 7.3% to
6.7%.
Yet, while the growth forecast downgrade has been
taken as a dovish signal by markets, we think that the linking of
the slowdown to transitory effects suggests that for now the RBI
is disinclined to cut rates further in support of
growth.
Inflation remains well below the double digits of
recent years, at 3.4%, but has risen sharply since a June low of
1.5%. Further rises are expected by the central bank, with the
possibility of fiscal slippages highlighted by governor
Patel.
He reiterated the commitment of the central bank
to an inflation target of around 4%, which leaves limited space
for further cuts at present. There will be concerns around the
inflationary effects of higher oil prices, government policies on
public sector pay and the recent implementation of the Goods and
Services Tax. As a positive, the RBI did say that household
inflation expectations are becoming anchored, which is key to
long-term inflation targeting.
Overall, we read today’s announcement and
briefing as indicative of a central bank on hold for the next six
months. The minutes, to be released later this month, may suggest
otherwise, but for now the central bank seems content to wait and
see whether data supports its view that the growth slowdown is
temporary."
