MUMBAI--The Reserve Bank of India left its benchmark lending
rate unchanged Tuesday as it waited for more signs that inflation
in Asia's third-largest economy is retreating.
The Indian central bank kept its overnight lending rate steady
at 8% for its fourth policy meeting in a row. The decision was in
line with the forecast of the dozen economists polled by The Wall
Street Journal, who unanimously predicted Governor Raghuram Rajan
would keep the repurchase rate steady
"With international crude prices softening and relative
stability in the foreign exchange market, some upside risks to
inflation are receding," Mr. Rajan said in his monetary policy
statement. "Yet, there are risks from food price shocks as the full
effects of the monsoon's passage unfold, and from geopolitical
developments that could materialize rapidly."
By leaving rates at a level many executives and politicians
consider detrimental to India's growth, Mr. Rajan has boosted his
reputation as an inflation hawk.
He is also making good on his pledge to prepare India for the
end of the easy-money policy in the developed world. The central
bank governor is worried that emerging markets could be hard hit as
they have become reliant on the extra liquidity that has been
sloshing around the globe.
Accommodative policy in advanced economies has fostered investor
risk appetite and increased and spread to various asset classes,
the RBI noted. The central bank pointed to risks stemming from a
sudden correction in financial markets if investors misread the
timing of a reversal in the U.S. monetary policy stance, and from a
further slowdown in the euro area.
The RBI left the statutory liquidity ratio and cash reserve
ratio requirements unchanged. But it said it would gradually lower
the ceiling on the amount of bonds that must be held until maturity
to 22% from 24% by Sept. 19, 2015. The statutory liquidity ratio is
the portion of deposits that banks must invest in safe assets like
government bonds.
Inflation still seems to be one of the main weak spots of the
Indian economy that has otherwise been gaining confidence and
allure. After years of subpar expansion, India's output looks set
to recover, with economists predicting gross domestic product
growth of as much as 6% in the year ending March.
Mr. Rajan has made it clear he thinks it is still too soon to
cut rates. In a recent speech he pledged to keep rates steady until
he has "broken the back of inflation."
Since taking over a little more than one year ago, Mr. Rajan has
switched the central bank's attention from its traditional focus on
wholesale price inflation to consumer-price index inflation rates.
He has previously said he is hoping to cap consumer inflation at 8%
by January 2015 and then at 6% 12 months later.
Consumer inflation cooled in August to 7.8%, leading many to
think the first target has been comfortably reached. However most
economists are more worried about the 6% target, which they say
will be difficult to sustain due to chronic production and
logistics bottlenecks in the Indian economy.
Mr. Rajan's attempt to be crystal clear about his inflation
ambitions seems to have blurred the market's expectations.
Economists interviewed ahead of the policy meeting predicted the
next rate move could happen anytime between the first months of
next year and the second half of 2016. Meanwhile they were split on
whether that would be a rate increase or a cut.
Still, investors seem confident that India is no longer a member
of the "fragile five" group of emerging economies that saw their
currencies weaken last year on concern they would struggle with the
tightening of the monetary policies in some advanced countries.
The central banks of India, Brazil, Turkey and other fragile
developing countries tightened policies to defend their
currencies.
In Asia, local currencies have again started losing ground
against the dollar in recent months amid signs the U.S. Federal
Reserve is moving closer to raising interest rates. Some analysts
fear Asian currencies have more ground to lose, as appetite for
riskier markets in the region fades.
The rupee hit a 6-month low of 61.53 against the U.S. dollar on
Monday.
"India should be far more resilient than most emerging
economies, but obviously there will be some kind of impact," said
Sujan Hajra, an economist with Anand Rathi. "We will see a reversal
of capital flows."
Write to Gabriele Parussini at gabriele.parussini@wsj.com
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