ibusinesslines.com November 15, 2018

Indian central bank keeps key interest rates unchanged

07 October 2018, 07:15 | Kelvin Horton

Indian central bank keeps key interest rates unchanged

Indian central bank keeps key interest rates unchanged

This calibrated tightening of the monetary policy is, as many claim, in keeping with the target to anchor CPI inflation at 4% and simultaneously encouraging growth.

The six-member committee headed by Governor Urjit Patel made a decision to keep the repo rate constant at 6.5 percent, after inflating the rates in its last two successive policy meetings.

The rupee touched a record low of 73.41 in the morning trade, while it saw some recovery during the day after it opened lower at 73.24 against Monday's close of 72.91 per dollar. This is why we won't be surprised if the RBI does hike more than 25bp this Friday, though our baseline remains only a 25bp now and another like move in the next meeting in December. Subsequently, the RBI raised the repo rate or short term lending rate by another 25 basis points in August policy meet.

He maintained that the value of rupee is determined by the market forces and the RBI does not have any "target or band" around any particular level of the exchange rate.

However, we also find it hard to believe that the central bank will turn a blind eye to the currency problem.

The MPC voted 5:1 in favour of a status quo, with only Chetan Ghate voting for a 0.25 per cent hike.

"Secondly, the price of the Indian basket of crude oil has increased sharply, by Dollars 13 a barrel, since the last resolution".

The policy-setting committee headed by Governor Urjit Patel opted to take a pause after hiking the rates in its last two successive policy meetings.

THE BSE benchmark Sensex plunged over 550 points on Wednesday to slip below the 36,000-mark on heavy selling in IT, auto and telecom stocks, after the rupee collapsed to a new life-time low amid surging crude oil prices.

However, the central bank warned that rising oil prices and tightening of global financial conditions pose substantial risks to growth and inflation. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals, it said. "Given the rising oil and trade tensions, traders will bet on exports going up, to curb further weakening in the currency", said Anand James, Chief Market Strategist at Geojit Financial Services.

An estimate of the impact of an increase in minimum support prices (MSPs) announced in July has been factored in the baseline projections.

It lowered the inflation outlook to a range of 3.9 per cent to 4.5 per cent for the second half of the fiscal year ending March from 4.8 per cent seen previously.

Rising protectionist tendancies, threats of currency wars and policy normalisation in the USA pose the biggest risks for domestic growth prospects, it said.

India's wholesale inflation fell to a four-month low of 4.53 per cent in August on softening of food prices.

The reverse repo rate also stayed at 6.25 percent.

The Reserve Bank of India will have to make a hard policy decision when it meets tomorrow, BAML says.

The rupee has continued its downward spiral on back of a consistent rise in crude oil price, which has already breached $85-mark for the first time in four years ahead of the United States sanctions on Iran.

Lately, concerns over a rise in inflation rate, high crude oil prices and an outflow of foreign funds from the country's equity market has subdued the Indian currency.

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