India's central bank holds interest rate steady as expected, signals tighter policy

Says it maintained policy stance of "withdrawal of accommodation" to ensure inflation progressively

MUMBAI (Reuters) - The Reserve Bank of India held its key lending [interest] rate steady on Thursday as expected but moved to reduce the amount of cash in banking system as inflation concerns resurfaced following higher-than-usual seasonal spikes in food prices in recent weeks.

The monetary policy committee (MPC), which has three members from the central bank and three external members, kept the repo rate (INREPO=ECI) unchanged at 6.50 per cent in a unanimous decision. It was the third consecutive time that the committee decided to maintain rates.

India has raised rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.

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The central bank, however, temporarily raised the cash buffer that banks are required to hold, which is expected to push up short-term rates in the market.

The benchmark 7.26pc 2033 bond yield was trading at 7.164pc as of 10:45 am IST, down marginally, while the rupee was unchanged at 82.8250.

The RBI maintained its policy stance of "withdrawal of accommodation" to ensure inflation progressively aligns with the committee's target while remaining supportive of economic growth, RBI Governor Shaktikanta Das said. "The job on inflation is still not done," he said.

Five of six committee members voted in favour of the stance.

The central bank raised its inflation forecast for the current financial year to 5.4pc from 5.1pc earlier, citing pressures from food prices. In the July-September quarter, it sees inflation at 6.2pc, significantly higher than the 5.2pc earlier forecast.

Monetary policy can look through food price shocks for some time, Das said. "We do look through idiosyncratic shocks but if it shows signs of persistence, we have to act."

Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, snapping a four-month downward trend. Analysts expect inflation to have reached 6.4pc in July, moving out of the RBI's 2pc-6pc comfort band.

The central bank took comfort in the fact that core inflation, which excludes volatile food and energy prices, has softened.

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"We believe the seasonal uptick along with erratic weather conditions will continue to keep the hawkish bias of the MPC intact in the upcoming meetings as well," said Upasana Bhardwaj, chief economist at Kotak Mahindra Bank. "However, we expect rates to remain unchanged through the rest of the year."

Growth in the Indian economy is seen at 6.5pc, unchanged from the RBI's previous forecast. "Demand in the economy remains buoyant," said Das.