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India’s central bank holds interest rates

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India’s central bank kept interest rates unchanged for the seventh time in a row on Friday, as it sees both lingering inflation risks and strong economic growth.

The Reserve Bank of India (RBI) said its benchmark “repo rate”, the level at which the central bank lends to commercial banks, would remain the same at 6.50 per cent.

Major central banks around the world have signalled a move towards rate cuts this year.

In India, inflation has been on a downward trajectory, but is still stubbornly above the RBI’s 4 per cent target.

The government has also forecast a heatwave in several parts of the country, which would threaten to send food prices spiking.

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Strong economic growth has also reduced the urgent need for a rate cut.

India’s economy grew at 8.4 per cent in the December quarter with a surging manufacturing sector helping defy more modest analyst forecasts.

“Looking ahead, robust growth prospects provide policy space to remain focused on inflation and ensure its descent to the target of 4 percent,” said RBI governor Shaktikanta Das.

But “uncertainties in food prices continue to pose challenges”, he added, so that “monetary policy must continue to be actively disinflationary”.

Interest rates were hiked by 2.5 percentage points between May 2022 and February 2023, but have stayed constant since then.

India’s retail inflation came in at 5.09 per cent in February, almost unchanged on the previous month, led mainly by an increase in food prices.

The country’s “core” inflation, which excludes food and fuel costs, remained below 4 per cent.

GDP growth

The RBI has retained the GDP growth projection at 7 per cent for 2024-25 fiscal on the back of expectations of a normal monsoon, moderating inflationary pressures, and sustained momentum in the manufacturing and services sector.

The headwinds from protracted geopolitical tensions and increasing disruptions in trade routes, however, pose risks to the outlook, Shaktikanta Das said. Going forward, he said the outlook for agriculture and rural activity appears bright.

“The strengthening of rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures and sustained momentum in manufacturing and services sector should boost private consumption,” Das said.

He further said the prospects of investment activity remain bright owing to an upturn in the private capex cycle becoming steadily broad-based; persisting and robust government capital expenditure; healthy balance sheets of banks and corporates; rising capacity utilisation; and strengthening business optimism as reflected in RBI’s surveys.

“Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.0 per cent with Q1 at 7.1 per cent; Q2 at 6.9 per cent; Q3 at 7.0 per cent; and Q4 at 7.0 per cent,” the RBI said. (Agencies)

 

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