Raghuram Rajan, governor of the Reserve Bank of India (RBI), pauses during a news conference. Photographer: Dhiraj
Raghuram Rajan, governor of the Reserve Bank of India (RBI), pauses during a news conference. Photographer: Dhiraj

Indian central bank Governor Raghuram Rajan kept interest rates unchanged, rebuffing pressure from the Finance Ministry to reduce borrowing costs that are among the highest in Asia.

Rajan left the benchmark repurchase rate at 7.25 percent after three cuts this year, including in June, the Reserve Bank of India said in a statement in Mumbai on Tuesday. The move was predicted by 39 of 42 economists in a Bloomberg News survey. Three expected a cut to 7 percent.

“Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy,” Rajan said in a statement. The central bank will monitor for room to ease policy as it awaits greater transmission of previous cuts, he said.

Rajan wants to ensure his inflation target of 6 percent by January isn’t at risk from surging food prices, a poor monsoon and a possible increase in U.S. interest rates next month. A Finance Ministry official on Monday said inflation can’t be the primary concern of policy makers, the latest sign of growing tensions with the central bank.

“A rate cut is not a given,” said Devika Mehndiratta, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. Inflation would need to be around the RBI’s projections for further easing to be considered, she said.

India’s benchmark stock index was trading 0.1 percent lower at 11:57 a.m. in Mumbai. The rupee strengthened 0.2 percent to 63.94 a dollar, and the yield on the 10-year sovereign bond was at 7.81 percent, little changed from yesterday.

Growth ‘Improving’

India’s pause contrasts with easing from China and Russia even as Asia’s third-biggest economy shows mixed signs of strength. Rajan said the “outlook for growth is improving gradually,” while noting that new investment in India remains subdued and a weaker global expansion may hurt exports.

Risks to his 6 percent inflation target in January are “broadly balanced,” Rajan said, with softer crude prices and a near-normal monsoon offsetting inflation conditions in June that “surprised somewhat on the upside.” Inflation projections for January to March 2016 are lower by about 0.2 percent, he said.

Food prices led by pulses pushed inflation to 5.4 percent in June, faster than estimated though below Rajan’s target for a tenth straight month. While June-September monsoon rainfall has been 6 percent below normal through Aug. 3, that’s not as bad as initially forecast.

“Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions,” Rajan said.

Monetary Policy Committee

While Prime Minister Narendra Modi’s government agreed this year to an inflation target of 2-6 percent, a draft bill unveiled last month threatens to water down the proposal. It would give the government majority control of a monetary policy committee and review the inflation target every three years, putting it at odds with recommendations from the central bank.

“The government and RBI have reached a broad consensus on what such a committee should look like and what the powers of the governor should be,” Rajan said in a briefing in Mumbai on Tuesday. “While the details have to be ironed out, there are no differences between the government and the RBI in this matter.”

Modi’s administration has taken steps in recent weeks to contain food costs by limiting gains in guaranteed prices for rice and lentils. Food accounts for almost half of the consumer-price index basket.

India’s Potential

Rajan needs to decide how much more support he’s able to provide to an economy where exports have fallen for seven straight months, factory output’s slowing and credit growth has failed to accelerate. The mixed signals cloud the outlook in an economy the government says grew 7.5 percent in January-March under a new calculation method.

“Though 7.5 percent GDP growth appears high, it is below India’s potential” of around 10 percent, Faraz Syed, an economist at Moody’s Analytics in Sydney, wrote in a July 29 report. “The biggest hurdle is private investment.”

While most economists in a separate survey see Rajan keeping rates unchanged in the coming months, before Tuesday’s decision swap traders were pricing in the chances of a cut to 7 percent by end-2015. That’s the steepest decrease after Turkey among 14 emerging markets tracked by HSBC Holdings Plc.

Banks will lower lending rates further between October-December as demand for loans picks up, the central bank said.