RBI surprises with status quo
After backtoback hike since June, the Reserve Bank of India RBI Friday kept interest rates unchanged, surprising markets that had expected a rate hike...
Mumbai: After back-to-back hike since June, the Reserve Bank of India (RBI) Friday kept interest rates unchanged, surprising markets that had expected a rate hike to support tumbling rupee and combat inflationary pressures from high oil prices.
With five of its six members voting for a status quo, RBI's monetary policy committee (MPC) left repo rate at 6.50 per cent and changed policy stance to 'calibrated tightening' (hawkish) from 'neutral', which RBI Governor Urjit Patel said meant there would be no rate cut in the current cycle.
The repo rate, at which the RBI lends to the system, will continue to be at 6.5 per cent, the reverse repo, at which it absorbs excess funds, will be at the same level of 6.25 per cent. The MPC voted 5:1 in favour of a status quo, with only Chetan Ghate voting for a 0.25 per cent hike.
Vowing to keep the inflation rate under targeted 4 per cent, RBI warned that volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to growth and inflation. A majority of the analysts and bankers had expected that RBI will raise interest rate by at least a 0.25 per cent with some even rooting for a 0.50 per cent increase in view of the developments over the last few days where rupee had continued to slide and international oil prices hit four-year high.
Soon after the monetary policy announcement, the rupee slid to a new record low, falling past the 74 to a dollar mark, before closing down 0.3 per cent to 73.7650. The domestic unit has fallen 14.5 per cent since January, making it the worst performing major Asian emerging market currency.
"Today's stance of calibrated tightening essentially means that in this rate cycle a rate cut is off the table, and that we are not bound to increase rates at every meeting," Patel told reporters here. "As new data comes in we would look into changing our policies accordingly".
Welcoming the decision of RBI to keep rates unchanged, Economic Affairs Secretary S C Garg said the government's assessment of inflation is in line with the MPC's assessment. "We believe growth should turn out to be higher than that projected by MPC," Garg said.
The RBI forecasted GDP growth of 7.4 per cent in the current financial year ending March 31, 2019 and 7.6 per cent in the next. "The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis," the resolution of the MPC after a three-day meet said. It projected an inflation rate of 4.8 per cent by June 2019, slightly better than the 5.0 per cent August forecast.
The resolution said actual inflation outcomes have been 'below projections' as the expected seasonal increase in food prices did not materialise and inflation, excluding food and fuel, moderated.
Lowering its inflation projections from the August review, the MPC headed by RBI Governor Urjit Patel said headline inflation is expected to rise to 3.7 per cent by September quarter-end, excluding HRA impact, 3.8-4.5 per cent by the second half of the fiscal and 4.8 per cent by the first quarter of the next fiscal. He said food inflation, a key component of the inflation basket, has been 'unusually benign'.