MUMBAI, June 5 - The Reserve Bank of India left its policy repo rate unchanged at 5.25% on Friday, opting to weigh the implications of recent crude price moves and capital outflows rather than react immediately to the rupee's decline.
Nearly 80% of 56 economists surveyed by Reuters had anticipated the Monetary Policy Committee would maintain the rate. In line with that expectation, all six members of the rate-setting panel - three internal central bank officials and three external appointees - voted to hold rates. The MPC also decided to continue with a "neutral" monetary stance.
Announcing the decision, RBI Governor Sanjay Malhotra said that "the central bank's rate panel noted that the global environment has deteriorated." He added that while headline inflation is expected to rise, underlying inflationary pressures remain benign and that second-round effects from the recent price shocks warrant close vigilance.
The rupee has weakened sharply in recent months, driven by a war-related spike in crude oil prices and record foreign fund outflows. Those factors have pushed the currency down nearly 5% to historic lows since the Gulf conflict began in late February, prompting some analysts to call for higher interest rates to support the currency. Policymakers across the region have taken a range of actions to address currency stress: Indonesia, the Philippines and Sri Lanka have raised rates in recent weeks, and South Korea has so far held steady but indicated a policy shift may be imminent.
India's retail inflation target is 4%, with an operational tolerance band of 2-6%. The RBI noted that retail inflation remains below target and is projected to stay within that tolerance band for the current fiscal year, providing the central bank some scope to maintain its policy stance for now.
On the growth front, the RBI observed that high-frequency indicators point to resilient activity. Industrial output and the purchasing managers index have shown steady momentum, suggesting economic growth has held up despite external pressures.
Context and implications
- The unanimous vote and continuation of a neutral stance indicate the MPC is prioritising assessment of incoming data over immediate tightening.
- Elevated crude prices and capital flow volatility are the primary external risks the RBI highlighted when deciding to hold policy unchanged.
- Domestic inflation remaining within the tolerance band is a key factor enabling the central bank to await clearer signals before altering the rate path.