RBI leaves rates on hold, eases liquidity
The Reserve Bank of India left interest rates on hold on Thursday after six increases since March but warned that the risk in its inflation outlook is to the upside and unveiled steps to address persistently tight liquidity.business Updated: Dec 16, 2010 13:51 IST
The Reserve Bank of India (RBI) left interest rates on hold on Thursday after six increases since March but warned that the risk in its inflation outlook is to the upside and unveiled steps to address persistently tight liquidity.
The Reserve Bank of India has been the most aggressive major central bank in Asia this year, lifting key lending and borrowing rates by 150 and 200 basis points, respectively, as surging prices spurred by rising food costs undermine purchasing power in an economy growing at nearly 9%.
Bond yields and swap rates fell after the RBI announced steps to cut the statutory liquidity ratio -- the minimum level of bonds banks must hold as a percentage of deposits -- to 24% from 25%, and unveiled a further $10.6 billion worth of bond purchases over the next month.
"India's activity data have been very resilient and with global inflation pressures not helpful ... the RBI is indeed likely to be pausing in its tightening cycle, not ending it," said Sean Callow, senior currency strategist at Westpac Institutional Bank in Sydney.
This year's policy rate tightening in India combined with tight liquidity in the financial system have had an effect, with inflation still high at 7.48% in November but trending downwards after breaching double digits earlier this year.
While the central bank has forecast the wholesale price index (WPI), the main inflation measure used in India, will ease to 5.5% by the end of the fiscal year in March, rising global commodity and energy prices pose upward risks.
"There is a risk that rising international commodity prices will spill over into domestic inflation. Going forward, rising domestic input costs for the manufacturing sector combined with aggregate demand pressures could weigh on domestic inflation," the central bank said in a statement.
As expected, the central bank left the repo rate, at which it lends to banks, unchanged at 6.25% and also kept the reverse repo rate, at which it absorbs excess cash, on hold at 5.25%.
The RBI left the cash reserve ratio (CRR), or the portion of deposits banks need to set aside as cash with the central bank, unchanged at 6%.
At 12.06 pm (0636 GMT), the most traded 8.08%, 2022 bond yield eased 2 basis points to 8.04%. The benchmark 10-year bond, the 7.80%, 2020 was down 4 basis points at 8.04%.
Indian oil retailers raised petrol prices by 5.6% this week and the government is expected soon to lift diesel prices by roughly 2 rupees a litre, moves that together could lift WPI inflation by 30 basis points and have a knock-on effect of the same magnitude as costs are passed along, Morgan Stanley wrote.
(US$1 = 45.35 rupees)
First Published: Dec 16, 2010 12:10 IST