World Economy

India central bank keeps policy rate on hold, keen to drain system's excess cash

Saikat Paul | Pacific Press | LightRocket | Getty Images

The Reserve Bank of India kept its repo rate unchanged at 6.25 percent for a third consecutive policy meeting on Thursday as it continues to guard against any potential flare-up in inflation and an uncertain global economic environment.

The RBI also announced it would raise the reverse repo rate by 25 basis points to 6.00 percent, narrowing the gap between the repo and the reverse repo to 25 bps.

All 60 economists polled by Reuters had predicted the RBI's monetary policy committee would keep the repo rate at 6.25 percent, where it's been since October. The meeting was the first of four so far with panel-made decisions where forecasters correctly predicted the outcome.

The MPC's vote was again 6-0, just like the previous meetings, as the panel continues to exhibit a united front in pursuing its objective of keeping inflation at around 4 percent, with elbow room of 2 percentage points at either side.

The RBI, which unexpectedly changed its policy stance to "neutral" from "accommodative" at its last review in February, reasserted its concerns about inflation. This comes in spite of calls for the RBI to do more to aid an economy growing at less than the 8 percent needed to create full employment.

"The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 percent, while supporting growth," said the RBI in the statement.

Concern on food prices

India's benchmark 10-year bond yield rose 6 basis points to 6.75 percent after the decision, but the rupee was range-bound at around 64.94 per dollar after earlier strengthening to as much as 64.8825.

The broader NSE share index was down 0.2 percent for day, after strengthening slightly following the RBI statements.

The consumer inflation rate climbed to 3.65 percent in February from a year earlier, picking up from its lowest levels in at least five years to approach the RBI's target of 4 percent.

The RBI is concerned that food prices could spike should India experience a below-average monsoon season in the middle of the year. It is also monitoring core inflation, which has stubbornly stayed around 5 percent for several months.

The state of the global economy is also weighing heavily within the RBI, as the U.S. Federal Reserve's tightening gives additional pause to central banks around Asia, with Australia this week becoming the latest one to hold rates.

India seems in good stead after attracting $8.85 billion in investment into debt and equities in March - the most since at least 2002 - sending the broader NSE share index to a record high and the rupee to a nearly 1-1/2 year high.

But the RBI has long worried about sudden reversals of foreign flows, after first-hand experience in 2013 when worries about Fed tightening plunged India into its worst currency crisis in more than two decades.

Follow CNBC International on Twitter and Facebook.