India's central bank holds rates, raises growth outlook

By Swati Bhat and Sudipto Ganguly

MUMBAI (Reuters) -The Reserve Bank of India (RBI) kept its key interest rate unchanged on Friday in a widely expected move, saying robust economic growth will give it space to focus on bringing down inflation towards its medium-term target of 4%.

The central bank raised its economic growth outlook for the current year but kept its outlook on inflation unchanged, though it warned of persistent price pressures on food.

Governor Shaktikanta Das said the RBI wants to ensure that inflation aligns with its target on a sustained basis.

The Monetary Policy Committee (MPC), which consists of three RBI and three external members, kept the repo rate unchanged at 6.50% for an eighth straight policy meeting.

Four out of six MPC members voted in favour of the repo rate decision. JR Varma and Ashima Goyal, both external members of the committee, voted for a 25 basis point cut in rates.

India's economy, Asia's third-largest, grew faster than expected in the January-March quarter but a surprising outcome in the recently concluded national elections rattled markets. A weakened mandate for the ruling Bharatiya Janata Party-led National Democratic Alliance has raised concerns about a slower pace of fiscal consolidation alongside higher welfare spending.

All but one of 72 economists in a Reuters poll had expected the MPC to hold the repo rate steady at 6.50%. Most economists believe the 6.50% rate is the peak of the current cycle and are not expecting any move until the October-December quarter.

The committee decided by a majority of four out of six votes to retain the 'withdrawal of accommodation' stance, with Varma and Goyal voting for a change in stance to 'neutral'.

"RBI's status quo on rates and stance was in line with market expectations but the split in voting patterns clearly shows the increasing probability towards a pivot in the policies ahead," Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said.

Until April, only one of six committee members had voted against the status quo in rates and policy stance.

Investors have been adding to bets the U.S. Federal Reserve could ease rates in September, following similar moves by the European Central Bank and Bank of Canada this week.

The RBI will not be guided by the principle of 'follow the fed', Das said. "While we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions."

The MPC last changed rates in February 2023, when the policy rate was raised to 6.5%.

India's benchmark 10-year bond yield rose 2 basis points to 7.02% after the policy decision while the rupee was little changed.

The MPC raised its full-year GDP growth forecast to 7.2% from 7% earlier and sees inflation averaging 4.5% in the fiscal year to March 2025.

India's economy remains resilient, Das said, adding he expects manufacturing activity to gain ground and consumption recover. Rural demand is also being aided by a pick-up in farm activity.

Investment activity is likely to stay on track, with high capacity utilisation, balance sheets of banks and corporates are healthy and the government will keep up infrastructure spending, the MPC said in its written outlook.

GDP data last week showed the economy expanded at a faster-than-expected pace of 7.8% in the March quarter, taking full-year growth to 8.2%.

Annual retail inflation eased slightly to 4.83% in April from 4.85% in March but was still well above the MPC's target.

Swap markets are signalling an extended pause in interest rates until the last quarter of the calendar year.

"The mix of strong growth and above-target inflation does not make a case for a shift to a less-restrictive policy setting as yet, validating our view that rate easing is not on the cards this year," said Radhika Rao, senior economist at DBS Bank.

"Political developments are not expected to sway the monetary policy direction or outlook."

(Reporting by Swati Bhat and Sudipto Ganguly; Writing by Ira Dugal; Editing by Savio D'Souza and Jacqueline Wong)