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Inflation pushes India central bank to keep rates on hold

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Reserve Bank of India governor Shaktikanta Das arrives for a press conference at the central bank’s headquarters in Mumbai on Thursday. Punit PARANJPE

Inflation pushes India central bank to keep rates on hold

High inflation prevented India’s central bank from cutting rates for a sixth time Thursday, while it slashed its annual growth forecast as the government struggles to jumpstart the economy.

The news will deal a blow to Prime Minister Narendra Modi, who is coming under pressure seven months into his second term to tackle unemployment, which is sitting at a four-decade high.

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 per cent, a nine-year low.

But it said it expected the economy to expand five per cent in the year through March, from its previous forecast of 6.1 per cent, as consumer demand and manufacturing activity contracts.

India’s economy grew 4.5 per cent in July-September, its slowest pace since 2013 and well off the 7.0 per cent enjoyed a year ago, according to government data.

That is well below the level needed to provide the millions of jobs sought by new entrants to the labour market every year, posing a major headache for Modi.

Economists surveyed by Bloomberg News had largely predicted the central bank would cut interest rates by 40-50 basis points to spark a recovery after a dismal year.

But a sudden spike in retail inflation to 4.62 per cent – beyond the central bank’s target of four per cent – encouraged the RBI to hit pause on further reductions as the government struggles to kickstart what was once the world’s fastest growing major economy.

RBI governor Shaktikanta Das told reporters inflation was likely to remain high through March 2020 as he explained his decision.

“We should allow some time to see the impact of government measures and the RBI’s (previous) rate cuts so we decided to wait and take a temporary pause,” he said.

Finance Minister Nirmala Sitharaman has announced a slew of reforms including easing restrictions on foreign investment in key sectors, slashing corporate taxes, and launching a privatisation drive aimed at reviving moribund state firms.

No benefit to consumers

But the measures have failed to raise confidence. Demand for everything from cereals to cars has plummeted while unemployment is at 8.5 per cent, its highest since the 1970s.

Das – a Modi ally – has cut interest rates five times in a row starting in February 2019, bringing them down by 135 basis points.

But debt-ridden banks have not reduced their lending rates, and so failed to pass on the benefits to consumers.

“Against the backdrop of growth slowdown, the RBI’s rate cutting has not made any major difference,” said Garima Kapoor, economist at Elara Capital. The “RBI has to ensure its massive rate-cutting cycle leads to lower rates for consumers”, she said.

The lack of credit, coming after the collapse of India’s shadow banking sector, has exacerbated the crisis, analysts say.

Public finances are also in a mess, with several state and union territory representatives calling for the government to release funds owed to them from a nationwide tax rolled out in July 2017.

The central government has not paid out some states’ share of taxes since August, local media reported Wednesday.

The Organisation for Economic Cooperation and Development (OECD) forecast a modest recovery for India Thursday, predicting annual growth of 6.2 per cent in 2020, but warned further reforms were needed.

OECD chief economist Laurence Boone urged New Delhi to “continue lowering barriers to trade to generate the investment and jobs India needs to raise living standards across the country”.

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