India’s central bank surprises by holding rates

India’s reserve bank has kept its key interest rate unchanged, confounding the expectations of some economists that it would cut rates to spur growth.

The bank announced on Wednesday that it would maintain the rate at 6.25 per cent, despite evidence that the government’s move to scrap 86 per cent of the country’s cash last November has hampered growth.

Just 16 of 46 economists surveyed by Reuters predicted the bank would hold rates, with most expecting the central bank to make its first cut of 2017 on Wednesday. Most had expected the RBI to lower its benchmark rate 25 basis points to 6 per cent.

Urjit Patel, the RBI’s governor, said that the decision was made to give the bank “flexibility in either direction” to cut or raise rates in the future, adding that he expected the Indian economy to bounce back strongly later in the year.

The bank also announced the eventual lifting of limits on withdrawals from bank accounts. Customers have not been allowed to take out more than Rs24,000 over the counter in a week while the RBI prints new banknotes. But R. Gandhi, the deputy governor, said the limits would be removed altogether from March 13.

The meeting was the first since the RBI defied expectations of a cut in December in the wake of Prime Minister Narendra Modi’s unexpected move to scrap 86 per cent of paper banknotes to fight corruption and counterfeiting, dampening India’s consumption and business activity in the year’s final quarter.

However, India’s services sector contracted at a much slower pace and manufacturing registered slight growth in January as broader business activity appeared to finally find its footing after months of disruption from demonetisation.

The RBI cut rates twice in 2016, once in April and again in October after the August appointment of Urjit Patel as the central bank’s new governor.

Ahead of Wednesday’s meeting, Shilan Shah at Capital Economics had cautioned against assuming the cut was a done deal, noting the bank had refrained from loosening in December when the need was ostensibly more urgent.

She added: “since then, the finance ministry has announced a slower pace of fiscal consolidation for FY17/18 than had previously been planned. Meanwhile, inflation looks set to rebound over the coming months”.

In December consumer inflation in India dropped to a two-year low of 3.4 per cent, further below the RBI’s long-term goal of 5 per cent but declining at a slower pace than a month earlier. Wholesale price growth picked back in December to 3.4 per cent after falling to 3.2 per cent in November.

The Indian rupee weakened slightly on the news, hitting a low for the day at 67.35 rupees against the dollar.