India Holds Rates as Inflation Nears Central Bank's Target

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Five of the six-member monetary policy committee voted for the move, which was predicted by 42 of 48 economists in a Bloomberg survey with the rest seeing a cut to 5.75 percent.

The uncertainty about India's fiscal management is being further exacerbated as the government is due to unveil its budget for the next fiscal year in early February, before the RBI's next meeting.

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India's central bank kept interest rates unchanged as rebounding inflation limits room to spur an economy struggling to recover from disruptive government policies. "Moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed".

The October bi-monthly statement projected inflation to rise and range between 4.2-4.6 per cent in the second half of this year.

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On Wednesday, after a two-day meeting, the RBI is likely to reiterate concern about inflation, as the annual rate increased to 3.58 percent in October. Supply chains have been broken and growth stayed below potential following the roll out of a new consumption tax and Prime Minister Narendra Modi's withdrawal of high-value currency notes, pushing his advisers to seek lower borrowing costs even as global central banks tighten.

RBI was widely expected to keep the repo rate unchanged because inflation inched up to a 7-month high and improvement in quarterly GDP growth rate took the pressure off lowering interest rates further. The decision on Wednesday would be aimed at striking a balance between strengthening the country's economic growth and securing the retail inflation target of 4 percent, plus or minus 2 percent on a durable basis, stated Scotiabank.

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Most economists expect CPI inflation to trend close to or above 4% in the coming months. The only repo rate cut this year was in August when RBI reduced it by 25 basis points (0.25 per cent). So the language which RBI has published about inflation trajectory about output gap both are indicating options of hiking the rate as well as keeping a pause but more tilted towards hiking a rate rather than pause and while market has discounted this to some extent.

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