India’s central bank kept interest rates on hold Thursday due to soaring inflation, even as the government’s annual budget announcement last week raised little hope of an economic revival.
The Reserve Bank of India (RBI) said the benchmark repo rate – the level at which it lends to commercial banks – would remain unchanged at 5.15%, a nine-year low.
Inflation in Asia’s third-largest economy surged to 7.35% in December, far above the 4% target set by the bank’s monetary policy committee (MPC), and driven up by a rise in the price of onions and other essential items.
“The outlook for inflation is highly uncertain at this juncture. On the other hand economic activity remains subdued … Given the evolving growth inflation dynamics, MPC felt it appropriate to maintain status quo,” the central bank said in a statement.
A survey of analysts by Bloomberg predicted the central bank would avoid cutting rates.
The bank added that the outbreak of coronavirus in China had also affected global growth prospects.
Analysts had hoped Finance Minister Nirmala Sitharaman’s budget announcement last Saturday would help kickstart the economy, but the absence of any major reforms dashed those expectations.
The government instead elected to relax its fiscal deficit target for the current financial year to 3.8% of GDP from a previous 3.3% in order to accommodate increased spending.
The central bank raised its growth projections for financial year 2020-21 to 6.0% from a December estimate of 5.0%, in line with New Delhi’s belief that a recovery remains imminent.
Prime Minister Narendra Modi’s right-wing government has been trying desperately to revive the economy, which has flagged for several quarters, with per capita consumption falling for the first time in four decades.
Growth for the September-ended quarter came in at 4.5%, the lowest in six years, and sharply below the 7.0% level recorded a year earlier.
That is well below the level needed to provide the jobs sought by 1.2 million entrants to the labor market every month, posing a major headache for Modi.
RBI governor Shaktikanta Das – a Modi ally – cut interest rates five times in a row starting in February 2019, bringing them down by 135 basis points.
But India’s banks, saddled with bad loans, have failed to pass on these benefits to consumers.