RBI keeps rates unchanged, shifts stance to ‘calibrated tightening’

In a surprise decision, the Reserve Bank of India’s rate setting Monetary Policy Committee (MPC) voted to keep the benchmark policy rate on hold on Friday despite rising crude oil prices and a weakening rupee. The committee voted 5:1 to keep the rates unchanged, with only Chetan Ghate, professor at the Indian Statistical Institute, voting for a rate hike.

The central bank also changed its stance from ‘neutral’ to ‘calibrated tightening’, indicating that there will not be a rate cut in the near future.

“...Today’s stance of calibrated tightening essentially means that in this cycle a rate cut is off the table and we are not bound to increase rates at every meeting. It is not required given our inflation outlook and forecast and rate at this point in time. As new data come in we will look into changing our policies accordingly, but the calibrated tightening is the appropriate stance at this point in time given the forecasts and conditions,” RBI Governor Urjit Patel said at a press conference after the announcement of the 4th Bi-monthly Monetary Policy review.

Market players were expecting the RBI to increase the policy rate by 25 basis points in view of rising crude oil prices, widening current account deficit, weakening rupee and foreign portfolio investors selling in the equity and debt markets in the backdrop of hike in interest rates by the US Fed.

The central bank may have kept the repo rate unchanged at 6.50 per cent given that the actual inflation outcomes, especially in August (3.7 per cent), were below projections.

The RBI has lowered its inflation projections for the July-September quarter of FY19 to 4 per cent (from 4.6 per cent earlier); October-March FY19 to 3.9-4.5 per cent per cent (from 4.8 per cent) and April-June FY20 to 4.8 per cent (from 5 per cent).

The central bank said the inflation outlook is clouded over by uncertainty over the impact of the minimum support price to farmers; the vulnerability of oil prices to further upside pressures; continued volatility in global financial markets; the impact on the inflation outlook if there is fiscal slippage at the Centre and/or the States.

On the rupee’s fall

The Governor observed that the rupee had experienced bouts of volatility since the MPC met in August. He, however, noted that:“the depreciation of the rupee has been moderate in comparison to several other emerging market peers. By end-September, the rupee had depreciated in nominal effective terms by 5.6 per cent since end-March. In real effective terms, the depreciation has been 5 per cent.”

Welcoming the MPC’s decision on policy rate, a Finance Ministry statement said the MPC decided to keep the repo rate unchanged on the basis of an assessment of the current and evolving macroeconomic situation. GDP growth projection for 2018-19 is retained at 7.4 per cent as in August. The inflation projections for 2018-19 and Q1:2019-20 have been revised downwards from the August resolution.

“The decision of the MPC is in consonance with the Government’s assessment of inflation and growth going forward and for achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent., while supporting growth,” the statement said.