India c.bank holds key rate; signals tight liquidity amid clouded inflation

MUMBAI, Oct 6 (Reuters) - The Reserve Bank of India kept its key lending rate steady for a fourth consecutive policy meeting on Friday, as widely expected, but signalled it would keep liquidity tight using bond sales to bring inflation closer to its 4% target.

The countrys monetary policy committee (MPC) kept the repo rate (INREPO=ECI) unchanged at 6.50%, in a unanimous decision. Most economists polled by Reuters had expected it to keep rates steady.

It has raised rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.

The committee remains “resolutely focused on aligning inflation to the 4% target on a durable basis,” RBI Governor Shaktikanta Das said.

The RBI also maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committees target while remaining supportive of economic growth.

Five of six committee members voted in favour of the stance.

The impact of past rate hikes is still to be fully felt across the economy, Das said.

Annual retail inflation eased to 6.83% in August, from a 15-month high of 7.44% in July, but remained well above the central banks 2%-6% comfort band. However, core inflation dropped below 5%.

Sharp spikes in food prices have been the main driver as erratic weather hurts production of staples like vegetables, milk and cereals.

“While declining core inflation is a silver lining, the overall inflation outlook remains clouded,” said Das, citing the impact of patchy rains and volatile global food and energy prices.

The central bank kept its inflation forecast unchanged and sees it averaging 5.4% in the financial year 2023-24. Its economic growth target was also unchanged at 6.5% for the year.

“The good part is that growth remains resilient and core inflation remains under check,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities in Mumbai.

“We maintain our call for a prolonged pause on repo rate at 6.5% well into fiscal year 2024/25 while liquidity over the medium term will be aimed at being close to neutral.”

The central bank sees inflation falling to its 4% target only by the second quarter of next financial year, it said in a separate report published alongside the monetary policy review.

“I would like to emphatically reiterate that our inflation target is 4% and not 2-6%. Our aim is to align inflation to the target on a durable basis, while supporting growth,” Das said

High inflation has put the focus back on liquidity management amid the RBIs reduced ability to keep hiking rates at the risk of hurting growth.

The central bank may consider open market sales of bonds to manage liquidity conditions in line with its inflation objectives, Das said.

Indias banking system liquidity has been in deficit but could improve as government spending has yet to pick-up.

The 10-year benchmark bond yield jumped to its highest level in six months, after Das said the RBI could consider open market sale of bonds. The benchmark 2033 bond yield jumped to 7.2832%, against 7.2197% before the policy decision.

The Indian rupee barely budged following the decision, and was at 83.2025 to the U.S. dollar, while local shares also remained higher with the benchmark BSE index (.BSESN) up 0.35%.