Inflation pushes RBI to keep rates on hold

6 December, 2019 12:00 AM printer

MUMBAI: 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, reports Xinhua.

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 percent, a nine-year low.

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

India’s economy grew 4.5 percent in July-September, its slowest pace since 2013 and well off the 7.0 percent 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 percent—beyond the central bank’s target of four percent—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.

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