In an unexpected announcement, India’s central bank left borrowing costs unchanged for a second straight meeting, shifting its policy stance to neutral from accommodative, effectively signaling an end to easing cycle. The RBI left the benchmark repurchase rate at a six-year low of 6.25 percent, on expectations of a 25 bps cut. Central bank authorities left rates unchanged at the last, December 7 meeting, while saying that the policy stance remains accommodative.
“The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetization on inflation and the output gap play out,†the RBI said. Governor Urjit Patel said the shift to neutral gives the central bank policy flexibility. “The non-food part of the consumer price index has been sticky at 4.8 to 4.9 percent,†Patel said at a press conference, adding that had it not been for a destruction of vegetables and other perishables due to the cash ban, consumer price inflation would have been 140 basis points higher than the 3.4 percent seen in December.
According to Bloomberg, the unchanged move was predicted by just five of 39 economists in its in house survey, while the rest saw a cut to 6 percent. The central bank forecast a sharp recovery in growth during the year through March 2018, helped by a rebound in consumption that has been hurt by Prime Minister Narendra Modi’s unprecedented cash ban.
Sovereign bonds plunged as several analysts were counting on lower borrowing costs to revive an economy hit by Modi’s withdrawal of some high-denomination currency notes last year. The Nifty 50 index dropped 0.5 percent to 8,723 while the Sensex fell over 160 points to 28,173. The Nifty Bank Index extended decline to over 1 percent post the RBI’s policy status quo. All 12 members of the index declined. The yield on government notes due Sept. 2026 surged 26 basis points to 6.69 percent as of 4:05 p.m. in Mumbai, according to prices from the RBI’s trading system.
