Pause reflects desire to ensure inflation remains below target of 6 percent

India's central bank left interest rates unchanged as commercial lenders in Asia's third-largest economy have yet to pass on two previous cuts to customers.

Governor Raghuram Rajan kept the benchmark repurchase rate at 7.50 percent, the Reserve Bank of India said in a statement in Mumbai on Tuesday, a move predicted by 33 of 42 economists in a Bloomberg survey. The rest saw a cut to 7.25 percent.

"Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data," Rajan said. The bank will watch for the transmission of previous rate cuts, price rises, government moves to ease supply and normalization of US policy even as India is "better buffered" against volatility, he said.

After unscheduled cuts that put India in the group of almost 30 central banks easing monetary policy this year, Rajan's pause reflects a desire to ensure inflation stays below a target of 6 percent by January. Key to his next move will be whether banks saddled with bad loans and sliding profitability overcome their reluctance to lower lending rates.

"Right now it's more important to ensure that the transmission of what they have already delivered happens," Sonal Varma, a Mumbai-based analyst at Nomura Holdings Inc, said in an interview before the decision, referring to the Reserve Bank's rate reductions.

Most banks have yet to pass on two previous rate cuts. The three-month interbank rate was little changed last quarter at 8.64 percent while the policy repurchase rate was lowered by 50 basis points.

Rajan said that the RBI would issue guidelines shortly to encourage banks to change how they calculate lending rates so they are more sensitive to the policy rate.

Little transmission

"Transmission of policy rates to lending rates has not taken place so far despite weak credit offtake and the front loading of two rate cuts," Rajan said. "With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review."

Inflation, which has averaged 5.3 percent this year, is key to Rajan's next move. Consumer price gains are set to moderate to 4 percent by August before firming up to 5.8 percent by March 2016, he said .

Upside risks including a weak monsoon and a surge in food prices appear offset by global disinflationary tendencies and slack in the domestic economy, he said.

Surveys indicate that consumer-price inflation will remain below the 6 percent target by January, hovering a little above 5.5 percent in the six months through March 2016, the central bank said in a separate report on Tuesday.

Growth outlook

Rajan has said he wants to maintain real rates at 1.5 to 2 percentage points, which would be lower than Brazil and China, according to Bloomberg. Investors are betting on the benchmark rate to fall another 50 basis points by the end of 2015.

India's rupee in March completed its first monthly loss this year as economists predict the US is set to increase interest rates for the first time since 2006.

Official data show conflicting signs that growth is taking off even as the government forecasts a 7.4 percent expansion in the last fiscal year, matching China as the world's fastest-growing major economy. The figures, recalculated earlier this year, have perplexed Rajan and other economists.

"The outlook for growth is improving gradually," Rajan said. "Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy."

The government revised gross domestic product figures "cloud an accurate assessment of the state of the business cycle and the appropriate monetary policy stance" and "render forecasting tenuous", the central bank said in its Monetary Policy Report.

Various models "point to a gradual pick-up in growth," the report said, while noting that a resurgence in inflation, a poor monsoon and fiscal slippage remain risks. Output growth, calculated using gross value added at basic prices, is projected at 7.8 percent in the year through March 2016 from 7.5 percent, rising to 8.1 percent in the next 12 months, the report said.

(China Daily USA 04/08/2015 page16)