India’s Central Bank holds key rate, keeping focus on inflation

The Reserve Bank of India struck a hawkish policy tone on October 6, saying inflation remains uncomfortably high and it may take measures to absorb excess cash in the market to keep price pressures under control, Report informs referring to Bloomberg.

Governor Shaktikanta Das and the rest of his six-member Monetary Policy Committee voted unanimously to keep the benchmark repurchase rate at 6.5%, in line with economists’ forecasts. Most of the committee members voted to keep the policy stance focused on “withdrawal” of liquidity.

While inflation eased slightly to 6.83% in August and is expected to slow in coming months, Das reminded market watchers that price-growth remains well above the target.

“I would like to emphatically reiterate that our inflation target is 4% and not 2%-6%,” Das said. “Our aim is to align inflation to the target on a durable basis, while supporting growth.”

He also warned of inflation risks from excess liquidity in the market, and surprised investors by announcing the RBI was considering selling bonds in order to soak up extra cash. That suggests a shift away from using interest rates to liquidity-management tools to control inflation.

The yield on 10-year notes climbed as much as 13 basis points, the most since August last year, to 7.34% after his comments.

The move “came as a warning to markets that they want to keep tight liquidity to control inflation,” said Venkatakrishnan Srinivasan, founder at Rockfort Fincap.