India leaves key interest rates unchanged

Mumbai: India’s central bank Governor Raghuram Rajan left interest rates unchanged while investors await clarity on whether he’ll get an extension when his term ends in September.
Rajan kept the benchmark repurchase rate at a five-year low of 6.5 per cent, the Reserve Bank of India (RBI) said in a statement in Mumbai on Tuesday. The move was predicted by all 44 economists in a Bloomberg survey, after data showed consumer prices jumped in April.
"The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain,” the central bank said. "Given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative.” As India’s growth surges past a slowing China, Rajan is looking to meet an inflation target and prepare for a gradual increase in US interest rates that may trigger capital outflows. Complicating the outlook is the government’s silence on whether it wants to extend Rajan’s three-year term in the face of opposition from an ally of Prime Minister Narendra Modi.
A strong monsoon, continued astute food management, as well as steady expansion in supply capacity, especially in services, could help offset” upward inflationary pressures, the central bank said.
Forecasts of above-average monsoon rains stand to ease food costs and boost rural consumption after back-to-back droughts. At the same time, a looming pay rise for government employees and higher oil costs pose risks to Rajan’s inflation target of 5 per cent by March 2017.
The rupee, one of Asia’s worst performers in 2016, will face more pressure in September as India starts paying back the majority of $34 billion in emergency foreign-currency swaps to overseas investors. While the central bank has been buying dollars, investors should expect volatility in the exchange rate, according to economists at Kotak Mahindra Bank Ltd.
Swap traders aren’t pricing in any more cuts through 2016, according to data compiled by HSBC Holdings Inc. A separate survey of economists shows expectations for one cut this year, in the October-December quarter.
The bar for any additional easing by the RBI is climbing, Richard Iley, chief economist for emerging markets at BNP Paribas SA, wrote on June 3."Assuming an abundant monsoon and a stabilization in oil prices close to $50 per barrel, a rate cut could be delivered” in August.
Rajan is also awaiting the effect of measures he took to speed up monetary transmission and ease banks’ access to liquidity. A surge in bad loan provisions at state-owned banks and tepid credit growth don’t bode well for corporate investment, which shows no signs of picking up.
The uncertainty over Rajan’s future poses a risk for investors who see India’s fast-growing economy as an attractive bet while Brazil and Russia contract. The former International Monetary Fund chief economist has faced criticism from a member of Modi’s ruling party for keeping rates unnecessarily high.
Since taking office almost three years ago, Rajan has rebuilt foreign-exchange reserves, stabilized the rupee and halved inflation.