RBI likely to hold rates, keep liquidity easy to boost bank lending

RBI likely to hold rates, keep liquidity easy to boost bank lending
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New Delhi, Dec 4: Analysts expect India’s central bank to support an economy that is losing momentum by leaving interest rates unchanged at a policy meeting on Wednesday when just over a month ago most of them had predicted a hike.
Having resisted any temptation to jack up rates in October when the rupee was sliding to a record low against the dollar, the Reserve Bank of India has been vindicated by the currency’s subsequent recovery, and by waning inflationary pressures thanks to falling food and oil prices.
The rupee is now nearly 6 per cent off its low and is expected to rally further as lower crude prices have also eased worries over India’s current account deficit.
“We expect interest rates to be on hold until March,” said A. Prasanna, head of research at ICICI Securities Primary Dealership in Mumbai.
“We also expect the tone of the statement to be dovish given inflation and growth momentum have softened, and the RBI will continue to keep infusing liquidity as bank lending growth needs to be supported to boost overall economic growth.” Since embarking on a tightening cycle in June, the RBI has raised its policy repo rate by 50 basis points, with the last increase to 6.50 per cent made in August. There are now clearer economic reasons to avoid going higher, analysts say. A pause in rate hikes would also be welcomed by Prime Minister Narendra Modi’s ruling party as it prepares for an election that must be called by May.
A poll of 70 economists predicted the RBI’s monetary policy committee would hold its repo rate steady this week, and predicted only one more increase, most likely in March. More than 60 per cent of 51 common contributors from an October poll switched their forecasts to no change from a hike. Intense government pressure on the RBI to remove some major curbs on lending ahead of the election also means it is likely to take a more dovish stance.
Policymakers have to nurse the shadow banking sector after a series of debt defaults by a major infrastructure lender. There had already been a sharp slowdown in lending by banks, laden with bad loans, and this had made them more risk-averse.
The difficult credit conditions have hampered Indian businesses still struggling to recover from a series of economic shocks including the sudden replacement of all large denomination banknotes in late 2016 and the introduction of a goods and services tax in 2017.

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