RBI keeps policy rates intact; stance unchanged

Business       by Sarfraz Ali | Published

Business by Sarfraz Ali | Published

The rupee, which touched an all-time low of 73.41 against the dollar, may have pushed the central bank to turn hawkish.

The rupee crashed below the 74 mark against the dollar after the Reserve Bank of India (RBI) has chose to keep the repo rate unchanged at 6.5 per cent.

In its earlier bi-monthly monetary policy reviews, the RBI had raised the interest rates for two successive times in June and August this year.

The RBI has allowed commercial banks to dig into their statutory reserves to ease the liquidity crunch.

The MPC, in its report, has said headline inflation is expected to accelerate to 4.5 per cent by March 2019 quarter with upside risks.

"The RBI voting for a pause indicates that there is an attempt on its part to address the domestic macroeconomic fundamentals to tackle headwinds in the global market".

Commenting on the RBI decision, Economic Affairs Secretary Subhash Chandra Garg tweeted: "Government welcomes MPC statement and decision to keep the rates unchanged".

The rupee rout on Wednesday has provided a flawless backdrop for the 3-day bi-monthly monetary policy review meeting by the Reserve Bank of India (RBI) in Mumbai. Thirdly, worldwide financial markets remained volatile with emerging market economies' (EME) currencies depreciating significantly.

The MPC (Monetary Policy Committee) statement of keeping the rates unchanged has come as a pleasant surprise to everyone since there was a consequent hike during the last two meetings. "The RBI is clearly of the view that they should let underlying trade competitiveness improve gradually as the trade-weighted exchange rate acts as a natural stabiliser".

The rupee is the worst performing emerging market currency having lost nearly 14 percent since January this year.

However, a likely intervention by the country's central bank aided in the Indian currency's recovery.

"This is a surprise given global financial markets have been very volatile and the way the rupee has moved, oil prices have risen and the US 10-year yield has also surged".

Whether the aggressive policy move (if we get one at all) will eventually keep the rupee from losing further ground remains a perennial question given the lingering risks of a wider trade deficit from high oil imports and elevated inflation expectations. Home loan rates remain untouched - in theory, as per the RBI's stance.

"We rule out a hike of 50 basis points, as it may spook the market". The RBI has also said that any fiscal slippage at the central or state level will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment.

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