Indian Central Bank keeps interest rates unchanged

MUMBAI—India’s central bank unexpectedly left interest rates on hold Wednesday despite a slowdown in the economy, signaling concern over rises in global commodity prices, and risks stemming from uncertainty over U.S. economic policy.

The Reserve Bank of India’s monetary policy committee headed by Governor Urjit Patel, kept the repurchase rate at 6.25%—the lowest level since September 2010. But a wide majority of the economists polled by The Wall Street Journal had forecast a cut based on difficult domestic conditions.

Asia’s third-largest economy is still reeling from an impromptu government decision to scrap most of the currency in November, which made the economy grind to a standstill and sapped demand, leading to a dip in inflation.

But the six-member committee overlooked domestic indicators to focus on global gauges that suggest prices will be on an upward swing in coming months. Gov. Patel rattled off the reasons of the bank’s decision not to cut: political tension is boosting oil prices, base metal prices are up, and so is the global food index.

Mr. Patel added to the list “the continuing uncertainty […] on a full rollout of U.S. macro policies, especially on the fiscal side, where we still await clarity,” referring to the measure-heavy first weeks of the Trump administration.

The surprise RBI decision is yet another sign that a global lull in inflation that has lasted for almost a decade is coming to an end. The U.S. Federal Reserve is expected to accelerate the pace of its rate increases, as unemployment recedes. Eurozone inflation in January neared the European Central Bank’s target of below, but close to, 2% after undershooting it for years. Japan’s economy has recently emerged from deflation.

India’s benchmark consumer inflation rate fell to 3.41% in December from a year earlier—its lowest level in two years and well below a 5% target set by the RBI for March 2017.

“The RBI’s decision […] signals the end of the loosening cycle” in India, said Shilan Sha, a Singapore-based economist with Capital Economics.

The RBI on Wednesday also changed its stance to neutral, after switching to accommodative in December 2014, where it had remained since.

Budget discipline had been cited by analysts as a factor likely to encourage a further easing of policy. India’s government unveiled a federal budget last week that aims to reduce the fiscal deficit to 3.2% of gross domestic product in the year starting April 1 from 3.5% this fiscal year.

Wednesday’s move surprised economists, who had been watching Indian inflation slow in recent months as domestic demand slumped in the last quarter and stable weather helped keep food prices down.

But even as inflation—a longstanding problem afflicting India, where prices were rising quickly for some time until 2014—seems to have been brought under control, the country’s consumers and businesses may not be able to benefit.

“The window to cut rates is narrowing,” said Madhavi Arora, a Mumbai-based economist at Kotak. “If it didn’t do it now it’s unlikely they’ll do it later.”