Nothing can move Rajan to reduce rates except the economic fundamentals.
Still, the inflation rate is up from 3.9% in February. And the rand experienced a further significant depreciation in response to domestic and global developments.
“A key uncertainty for the MPC is the extent to which the United States policy normalisation is already priced into the currency”, Kganyago noted. These risks included spillbacks associated with an abrupt slowdown in the Chinese economy and a surprise devaluation of the renminbi, both of which contributed to the US Fed keeping its policy rate unchanged at its September 2015 meeting. This decision was influenced by depreciating exchange rates, contractions in the mining, manufacturing and the agricultural sector. “However, the extent is uncertain, with the possibility of a temporary overshoot in a highly volatile environment”.
In growing contrast with the government, which is desperate to accelerate a sluggish recovery, an increasingly independent RBI under governor Raghuram Rajan remains focused on a long-term inflation target of 4 percent and ending decades of damaging price volatility.
A decline in worldwide oil prices has provided a few relief. Higher food prices and low commodity prices are also expected to weigh heavily on the economy for the rest of 2015, he said. Thus, by way of determining the opportunity cost of funds for the bank, the central bank uses the repo rate as an instrument of orchestrating monetary policy. A Reuters poll this week found 72 of 93 economists expected a rise in December. At 1200 GMT it stood at 3.0270, having weakened after the rate decision.
“The MPC is also concerned about domestic growth prospects, with the economy contracting in the second quarter”.
However, Governor Lesetja Kganyago retained his hawkish stance after raising rates by 0.25 point in July, the first time the bank had raised rates in a year.
For those pointing to the lack of credit growth as a counter-example we would point out that 1) New Zealand’s is, in fact, picking up and 2) to get a true read on the force of current interest rate settings one would need to remove the Reserve Bank’s LVR (loan-to-value ratio) restraint.
“The Monetary Council made it clear in July that the easing cycle was over and that we should expect permanently loose monetary conditions”.
MONDAY, SEPTEMBER 28 MUMBAI – Indian Finance Minister Arun Jaitley will meet the officials of Reserve Bank of India to discuss October-March borrowing calendar. “Time will tell how the hike plays itself out”, he said.
The country has seen two rate hikes since July previous year.
In a question and answer session, Kganyago assured that the MPC was not influenced by the US Fed decision but took into consideration the context of South Africa.