(Aug 5): The Reserve Bank of India (RBI) kept its benchmark rate unchanged for a fourth straight review, as expected, waiting to see whether higher energy costs from the Iran war spill over into broader inflation.

The six-member monetary policy committee, headed by Governor Sanjay Malhotra, voted unanimously on Wednesday to hold the repurchase rate at 5.25%. The decision was predicted by a majority of the 30 economists surveyed by Bloomberg. The committee also retained its neutral policy stance with inflation holding well within the RBI’s 2%-6% tolerance band.

There are still “little signs of generalisation of price pressures so far”, Malhotra said in a televised statement from the RBI headquarters in Mumbai. “There is a need for greater clarity to emerge, especially regarding inflation, its path and composition before taking any policy action.”

The RBI has stood apart from many regional peers by keeping interest rates unchanged since the conflict in the Middle East began, even as counterparts from Japan to Australia and Indonesia tightened policy. 

The RBI views the war as a temporary supply shock, arguing monetary policy should respond only if higher energy costs trigger more broad-based inflation. With growth remaining among the strongest of any major economy and inflation still within the RBI’s comfort zone, the central bank has room to wait.

Yields on benchmark 10-year government bonds extended declines to 6.77% after the decision. The rupee held gains to trade 0.4% higher at 95.0313 per dollar.

While consumer prices remain within the RBI’s comfort zone, retail inflation breached its 4% target for the first time in 17 months in June. Figures for July are due next Wednesday as signs emerge that price pressures may prove more persistent. 

Malhotra said that headline inflation will likely rise further in the near term, before peaking in the third quarter, driven largely by food and fuel costs. “It is not getting broad based. Core inflation continues to remain moderate,” Malhotra said. 

“The MPC underscored that it will maintain a closed vigil and remain resolute in its commitment to align inflation with the target,” he added.

The RBI slightly lowered its inflation forecast for the year through March to 5% from 5.1% previously.

The assessment contrasts with a finance ministry warning last week that inflation was broadening beyond food. Separately, India’s largest consumer goods companies are preparing a second consecutive round of price increases as they pass on higher input costs.

As a result, many economists predict the central bank will begin its tightening cycle when it next meets in October. The last time the RBI raised rates was in February 2023. 

Policymakers will have a reading on the economy before then, with gross domestic product data due on Aug 31. Growth had accelerated to 7.8% in the January-March quarter, keeping India among the world’s fastest-growing major economies.

The RBI narrowly upgraded its GDP growth forecast to 6.7% for the year-ending March 2027, from its previous estimate of 6.6%.

Risks to the outlook persist, however. 

Rainfall remains deficient in parts of the country, and the area planted with key crops including rice and pulses continues to lag last year’s levels. Food is the largest component of India’s consumer price index. 

The war in Iran is also raising the risk of imported inflation, given India imports roughly 90% of its crude oil needs. 

The rupee, meanwhile, remains among Asia’s worst-performing currencies this year despite measures introduced in June to attract foreign-currency inflows. Those steps have brought in more than US$40 billion (RM163.7 billion) and helped cushion the currency’s decline, but pressure is likely to persist as geopolitical tensions keep the dollar strong.

Uploaded by Chng Shear Lane