(Bloomberg) -- The Reserve Bank of India left its key interest rate unchanged for a second meeting and retained its tightening stance, signaling rate-setters want to see inflation moderating further while weaker monsoon risks remain a concern. 

A six-member monetary policy committee voted unanimously to keep the benchmark repurchase rate at 6.50%. All 40 economists in a Bloomberg survey predicted the hold.  

The panel decided 5:1 to retain the policy stance focused on “withdrawal of accommodation,” which was introduced April last year. Thirteen of the 18 economists who shared their forecast on the stance expected the move.  

“Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain,” Governor Shaktikanta Das said in a livestreamed address from Mumbai on Thursday. 

“The continuation of the stance of withdrawal of accommodation should be seen from this perspective,” he added. 

Bonds edged lower, with the yield on 10-year note rising by three basis points to 7.01%, while the rupee was steady. Stocks declined, paring earlier gains.

India joins most global central banks on pausing on rate hikes as commodity prices ease and policy makers are starting to signal their tightening cycle has concluded. At the same time, surprise rate hikes in Australia and Canada this week underscore the stickiness of inflation worldwide. 

Das reiterated the rate hold is a pause, not a pivot in the post-policy press conference.

“There is very little sense of any shift in RBI’s policy thinking today, as the resilient growth and falling inflation provides a lot of degrees of freedom, from a policy perspective,” said Rahul Bajoria, economist at Barclays Plc. 

Economists surveyed in a Bloomberg survey saw India’s May’s inflation pace slowing 4.39%, a 20-month low when data is released next week. The RBI wants to see inflation settle near the mid-point of its 2%-6% range. Inflation in March and April fell within the upper limit of the target. 

“Inflation should align with 4% target on a durable basis, not a one-off basis,” Das said after trimming the RBI’s inflation forecast to 5.1% from 5.2%. “It is always the last leg of the journey which is the toughest,” he added.  

The rate-setters will now train their focus on the progress of monsoons and the likely occurrence of El Nino this year, which dries up crops and tightens food supplies. Das mentioned “monsoon” at least six times during his speech. 

The weather office has maintained its forecast for normal rainfall though the arrival has been delayed. The government increased the guaranteed prices for monsoon-sown crops to Indian farmers this week, a factor that has already been built into the RBI’s projections, Das said. 

What Bloomberg Economics Says

The Reserve Bank of India moved in line with expectations in holding rates, but delivered a surprise by retaining a tightening bias. Keeping the stance of accommodation withdrawal signals the RBI now sees greater upside risks to the inflation outlook. 

— Abhishek Gupta, India economist

For full report, click here

“The vigilance on inflation has been reiterated, indicating that the MPC is not ready to lower its guard on prices despite recent positive surprises, said Anubhuti Sahay, the Mumbai-based South Asia chief economist at Standard Chartered Plc. 

The central bank retained a 6.5% growth target in the current fiscal year, indicating it wants to preserve the trajectory of India’s booming economy even as rising inequality is squeezing consumer spending. The latest quarterly growth figures blew past estimates, bringing India’s economic expansion to 7.2% and making the South Asian country one of the fastest growing regions in the world.  

Das said the RBI will remain nimble in its liquidity management. The monetary authority intensified its operations to remove cash from the banking system in recent weeks, draining about 1.5 trillion rupees ($18.2 billion) this month alone. 

The central bank’s efforts to remove short-term funds from the system comes amid a jump in deposits with banks after the withdrawal of high-value currency notes and a dividend payout by the RBI to the government.

Here’s more from Das and other rate-setters:

  • RBI will ensure the orderly completion of the government’s market borrowing program
  • Banks can set own limits for borrowing in call money market
  • Current account deficit should remain eminently manageable in 2023-24
  • The central bank also widened the scope of the framework for resolution of stressed assets
  • RBI will rationalize licensing framework for authorized persons under Foreign Exchange Management Act
  • About half of withdrawn 2,000 rupee notes have been returned. See earlier report

--With assistance from Kartik Goyal, Subhadip Sircar and Malavika Kaur Makol.

(Updates with comments from press conference in eight paragraph.)

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