Reserve Bank of India Holds Interest Rates for Third Meeting in Inflation Fight

IndusView, Tuesday 5 August 2013 (London): The Reserve Bank of India (RBI) today left its benchmark lending rate unchanged at 8%, resisting calls from the country's businessmen and policy makers to cut interest rates to help revive economic growth.

The Indian central bank kept its overnight lending rate steady at 8% for its third policy meeting in a row. The decision was in line with the expectations of most economists polled by The Wall Street Journal. Only one out of 15 analysts surveyed expected a quarter-percentage point cut to 7.75%, with the rest of them predicting no change.

"It is appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged," said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Getting inflation under control is the best way to encourage sustainable long-term growth.”

India's economy expanded 4.7% in the year ended March, the second consecutive year where the gross domestic product has risen less than 5%. India hasn't had two successive years of below-5% growth since the late 80s.

India's economy has been showing some encouraging signs recently. May industrial production picked up to 4.7% year-over-year, up from 3.4% the previous month. Business confidence increased in June, hitting a 17-month high.

The RBI has been focusing on the consumer-price inflation rate, which has fallen more than expected in recent months. The increase in consumer prices has cooled from an average of 10% in 2013 to 7.3% in June, the slowest rise since the central bank started measuring consumer price index (CPI) in January 2012.

High oil prices have a crippling effect as they push up the prices of food and other commodities because of the increased transportation costs. Vegetable prices rose 9% while fruit prices rose nearly 21% year on year in June, when monsoon was 48% below average, although rainfall improved in July, the second month of the monsoon season.

India's heavy reliance on imported oil—especially from Iraq, which accounts for about 13% of its imports — makes the country more vulnerable than most to conflicts in the Middle East.

The weather is another source of concern, with the lower-than-normal rains from the monsoon—which runs from June through September — likely to reduce the supply of grains and vegetables and push up prices. Most of the country's farmlands depend on rainwater for irrigation.

“Sentiment on domestic economic activity appears to be reviving, with data suggesting a firming up of industrial growth and exports,” said Rangar. “Economic reforms announced by the new government of Narendra Modi should create a congenial setting for a steady improvement in domestic demand and supply.”