- POSTED: 03 Jun 2014 14:30
- UPDATED: 03 Jun 2014 17:46
India's central bank kept key interest rates unchanged Tuesday in its first monetary policy announcement since new pro-growth Prime Minister Narendra Modi took office.
MUMBAI: India's central bank kept key interest rates unchanged on Tuesday in its first monetary policy announcement since new pro-growth Prime Minister Narendra Modi took office and signalled a dovish tone.
Amid speculation the Reserve Bank of India's (RBI) stern stand on inflation could clash with Modi's aim of reviving the economy, the bank's chief Raghuram Rajan appeared to soften his hawkish stance.
After meeting in financial capital Mumbai, the RBI said the benchmark repo rate, at which it lends to commercial banks, would remain unchanged at 8.0 per cent and the cash reserve ratio would be kept at 4.0 per cent.
Modi's decisive election result, together with "improved sentiment", should create a sound environment for new policy steps and a revival in demand as well as gradual growth recovery, Rajan said.
"The tone of the RBI is definitely dovish. In fact, they seem to be now open to the idea of easing (rates)," said Vivek Rajpal, an Asia interest rates strategist for financial services firm Nomura in Singapore.
Rajan said it was appropriate to leave rates unchanged and allow the impact of three rate hikes since last September to feed through the system and offset inflationary pressures.
If inflation eases faster "than currently anticipated, it will provide headroom for an easing of the policy stance," said the former International Monetary Fund chief economist.
The bank also cut the statutory liquidity ratio, the amount banks must keep in government securities, by 50 basis points to 22.5 per cent to free up funds for the banking system and spur economic activity.
Rajan's policies since taking office have been widely credited with helping to reduce the current account deficit -- the widest measure of trade -- and restoring the rupee's stability.
But his tight monetary policy has disappointed business leaders who have called for lower borrowing costs to jumpstart growth -- a view analysts say could find sympathy with Modi's Bharatiya Janata Party (BJP) government.
The economy expanded by just 4.7 per cent last year -- the lowest level in nearly a decade, and half the rate during India's boom years.
But with overall consumer inflation nudging nine per cent and food inflation near double-digits, amid fears a weak monsoon could push prices higher, the RBI had scant scope to ease rates at Tuesday's meeting, economists said.
The Federation of Indian Chambers of Commerce and Industry (FICCI) nevertheless said it would have preferred to see a "softer stance" on policy rates.
Monetary policy "must take due cognisance of all factors and not anchor itself to just inflation", said the federation president Sidharth Birla.
Shares on the Bombay Stock Exchange, which have risen more than 20 per cent since Modi was announced as the BJP's candidate in September, rose by 0.71 per cent to 24,860.49 points after the RBI decision.
Rajan, whose chiselled features prompted the daily Times of India to describe him as an "economist with rock star appeal", warned when he took over the job he might have to take unpopular steps to achieve "low and stable inflation".
Modi's right-wing BJP swept to victory last month, ousting the left-leaning Congress, and he faces huge public expectations to live up to election promises of "better days ahead".
Although the RBI came in for criticism from the BJP before the election for keeping rates high, Rajan at a conference in Tokyo last week dismissed any discord.
There is "often a tendency to try and find a wedge between the two and widen the wedge", he said.