MUMBAI: India’s central bank held interest rates on Thursday, in line with analysts’ expectations, citing inflationary pressures from an imminent tax reform and the possibility of a poor monsoon.
The Reserve Bank of India (RBI) said the benchmark repo rate – the level at which it lends to commercial banks — would remain at 6.25 percent.
It was the third consecutive monetary policy committee (MPC) meeting in India’s financial capital Mumbai where rates have been left unchanged.
RBI governor Urjit Patel said a new national goods and services tax (GST) due to be introduced on July 1 could push inflation up, while a weak monsoon could lead to a poor harvest and a rise in food prices.
“(There is) the uncertainty surrounding the outcome of the south west monsoon in view of the rising probability of an El Niqo event around
July-August, and its implications for food inflation,” Patel said in the statement. “Another upside risk arises from the one-off effects of the GST,” he added, referring to the new tax which will transform India’s economy into a common market.
The RBI forecast inflation for the first half of fiscal year 2017-18 to be 4.5 percent, rising to 5 percent for the second half. It has a target of keeping inflation around four percent.
All 52 economists surveyed by Bloomberg News had predicted that the rate would remain unchanged, largely because of an excess of liquidity in the banking system following a high-profile cash ban.
The government’s shock decision to remove high-denomination currency notes from circulation in November saw consumers rush to deposit their old bills in exchange for new ones. Large amounts of deposited cash can lead to a rise in inflation if
banks start using the money to increase lending. Low interest rates fuel consumer spending, which also causes an uptick in inflation.
