India unexpectedly keeps rates unchanged before Fed decision

Mumbai: India’s central bank unexpectedly kept interest rates unchanged before a possible increase in US borrowing costs this month, as Governor Urjit Patel awaits clarity on the impact of the cash clampdown.
The benchmark repurchase rate will stay at a six-year low of 6.25 per cent, the Reserve Bank of India (RBI) said in a statement in Mumbai on Wednesday. The move was predicted by only eight of 44 economists in a Bloomberg survey, while 31 expected a cut to 6 per cent and five saw a reduction to 5.75 per cent.
"The imminent tightening of monetary policy in the US is triggering bouts of high volatility in financial markets," the RBI said. Back home, while growth will probably slow in the current year due to the cash ban, it’s important to analyse more information amid threats to meeting the inflation target, it said.
"Accordingly, the policy repo rate has been kept on hold in this review, while retaining an accommodative policy stance," the RBI said.
The decision risks souring ties with Prime Minister Narendra Modi’s government, which said its cash ban would create room for lower borrowing costs. Economists predict India will lose its status as the world’s fastest-growing big economy as the currency clampdown dents demand.
Key points from the statement:
Inflation could slow by 10-15 basis points in October-December due to the cash clampdown. Consumer price gains are projected to be 5 per cent in January-March with risks tilted to the upside, though lower than what was seen in October Gross value added — a key input of gross domestic product — will grow 7.1 per cent instead of the 7.6 per cent forecast earlier, with risks evenly balanced All six members of the monetary policy committee voted to hold rates. The yield on the benchmark note due September 2026 surged 13 basis points to 6.33 per cent after the policy decision. The rupee was little changed at 67.9150 a dollar.
"Further rate action will be very much data driven, both domestically and on the international front," said Rupa R. Nitsure, group chief economist at L&T Financial Services Ltd. in Mumbai, who’d correctly predicted the central bank’s decision. "The global situation is very volatile."
Private economists have slashed their growth forecasts for India as Modi’s shock Nov. 8 decision to ban 86 percent of currency in circulation dents demand in the cash-based economy. A steep economic slowdown risks hurting foreign investment into India and voters’ perceptions of Modi before key state elections next year. Patel, meanwhile is fighting fires on all fronts just three months into the job.
Apart from the concerns about growth, investors are also questioning his low profile amid the cash chaos. Patel’s most immediate concern, however, will be to manage a surge in liquidity as Indians rush to exchange their defunct bank notes. More than Rs12 trillion ($177 billion) has poured into bank deposits from November 10 to December 3, pushing the monetary authority to resort to extraordinary measures.