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Economy

India pauses on rate cuts to tame inflation in surprise move

Central bank leaves room for future monetary loosening amid stagflation concerns

The Reserve Bank of India had continued to lower interest rates since this February as it tries to bolster the country's flagging economy even as inflation heats up.   © Reuters

MUMBAI -- The Indian central bank on Thursday held its repo rate steady at 5.15% on Thursday as the South Asian country battles both rising inflation and the slowest economic growth since Prime Minister Narendra Modi took office in 2014.

The unanimous decision by the Reserve Bank of India's six-member Monetary Policy Committee to stand pat surprised many market watchers and economists who had predicted a cut of least a 25 basis points.

The reaction in the stock and currency markets was muted. The Bombay Stock Exchange's Sensex index fell nearly 0.5% and the rupee weakened against dollar soon after the announcement. But within an hour, the losses were pared back.

The interest rate decision takes place against a backdrop of higher prices in recent months, especially for essential food items. In October, food inflation soared to 7.9% from below zero at the beginning of the year. Flooding across the country, which disrupted supplies, is largely blamed for spiraling prices.

The central bank raised its inflation forecast to 4.7% to 5.1% for the half year between October 2019 and March 2020, and slashed its GDP growth forecast from 6.1% to 5.0% for the year through next March.

"The MPC recognizes that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture," the committee said in a statement. It also said it would "continue with the accommodative stance as long as it is necessary to revive growth."

Gov. Shaktikanta Das also repeated at a news conference Thursday that the central bank will continue supporting the government's efforts to boost growth. "Both [the government and the central bank] are committed to the revival of growth," he said.

The central bank cut rates aggressively, by a total of 135 basis points from February to October, to support Modi's efforts to get the economy firing on all cylinders again.

The government has also tried to gin up growth by cutting corporate taxes, recapitalizing banks and giving aid to the real estate, export and automotive sectors.

However, these efforts have yet to bear fruit, with industry weighed down by weak domestic demand. India's gross domestic product grew 4.5% on the year in the July to September quarter, hitting a six-year low.

This has raised fears of stagflation. The consumer price index rose 4.6% in October, reaching a 16-month high and topping the central bank's median inflation target of 4%. "The risk [of] inflation is largely emanating from rising food prices," CARE Ratings said in a recent note. However, it predicts the CPI inflation will fall to 4.0% to 4.5% "by March 2020."

"We think that this easing pause is temporary," Madhavi Arora, Lead Economist, Edelweiss Securities, said in a statement on Thursday. "In a situation when [a] growth slowdown looks more entrenched and underlying core inflation has slumped to sub-3.5% amid [a] widening output gap, the monetary accommodation still has further steam for another 50 [basis points] in this rate cut cycle."

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