MUMBAI, India – India’s central bank surprised many Wednesday by keeping its key interest rate unchanged despite a worrying rise in inflation, citing concerns over sluggish economic growth.
The Reserve Bank of India held the benchmark rate at which commercial banks borrow from it steady at 7.75 per cent. Markets reacted enthusiastically, with the Bombay Stock Exchange’s Sensex index breaking a six-day slump to jump 1.3 per cent to 20,872.58 in the hours after the trading.
The central bank had been widely expected to raise the rate for a third time in a row after November inflation rates were worse than expected. Ninety per cent of bankers polled by local CNBC-TV 18 ahead of the decision had predicted another 0.25 per cent hike.
However, the bank also is walking a tightrope in its monetary policy because raising interest rates too high could weigh down already sluggish economic growth. Asia’s third-largest economy hit a 10-year low earlier in its expansion this year before improving somewhat to 4.8 per cent in the most recent quarter, still far below the average 8 per cent growth India saw for the past decade.
Reserve Bank chief Raghuram Rajan reiterated the tough balancing act, saying the decision was a close one, especially because rising food and fuel costs drove inflation to a 14-month high of 7.5 per cent in November.
“Current inflation is too high. I repeat, it is too high,” Rajan said, but added that the growth numbers were still “weaker than we would like.”
He said there was a risk that being overly reactive to the prices could further weigh down growth in light of recent weak industrial output numbers. And he said the two rate hikes since September should be given more time to take effect.
Since taking over as governor of the RBI, Rajan has kept markets guessing on his moves, hiking the benchmark rate in his first policy review in September when he was expected to keep them steady or even make a cut to try to spur growth.
Speaking to reporters Wednesday, the respected former International Monetary Fund chief economist told reporters he resisted being labeled as either an inflation hawk or dove, adding that the job of the reserve bank is to consider all economic data as a whole.
A drop in India’s current account deficit plus the expectation that soaring vegetable prices may come down in coming months prompted the bank to hold the interest rate steady, especially since core inflation — which excludes volatile food and fuel prices — has been more stable.
Rajan warned, however, that it will raise rates again if inflation continues to rise in coming months.
“Let me assure you, the Reserve Bank will be vigilant,” he said.