Friday, 15 February, 2019

India surprises by leaving policy rate unchanged, rupee tumbles

India surprises by leaving policy rate unchanged, rupee tumbles India surprises by leaving policy rate unchanged, rupee tumbles
Nellie Chapman | 07 October, 2018, 17:33

"Also, the rupee has depreciated to its all-time low to 74 against the dollar should attract NRI property buyers". But in light of the prevailing uncertainties, the committee maintained a neutral stance till August.

Lowering the inflation forecast to a range of 3.9 per cent to 4.5 per cent for the second half of the year ending March, from 4.8 per cent previously, allows the MPC room to pause on rates, he said. And the decision it makes "will highlight the RBI's bias to the market in terms of it objective and mandate".

The Reserve Bank of India (RBI) said on Friday it has been trying to ensure the foreign exchange market remains liquid and is not targeting any particular level. Turbulence in global stock and commodity markets and one-way shifts in currency flows in the wake of reversal of quantitative easing increasingly put pressure on the rupee. Bank Indonesia added 25 bps to its four previous hikes this year, bringing rates to 5.75 percent as expected, or 150 bps higher since May.

Monetary Policy Committee (MPC) started its meeting Wednesday and is expected to arrive at a resolution Friday. What happens in the future is important because the RBI's decision on whether or not to hike rates is driven more by expectations of future inflation rather than present levels.

The market analysts were expecting a repo rate hike to push the value of rupee, which has weakened more than 13 per cent against the dollar so far this year.

"The rupee has extended losses as the RBI monetary policy meeting has clearly disappointed the street". While a 25 basis points hike in repo rate is a given, the market may be keenly awaiting other measures by the RBI to shore up rupee. Surge in the global prices of crude oil has been the major party spoiler; per barrel cost of crude has surpassed $80, making it costly for importing, thus leading heavy depreciation in the Indian currency. Despite domestic inflation running in double digits in 2013, they only lifted the policy rate twice by 25bp in September and October 2013.

Unveiling the bi-monthly monetary policy, the central bank warned that volatile and rising oil prices and tightening of global financial conditions pose substantial risks to growth and inflation. Retail and food inflation also fell in the third quarter, bringing respite to the unabated hike in fuel prices.

The good news for the moment has been the stance of the RBI that has boldly decided not to increase the rates despite the given challenges.

This ties in directly to the current volatility in global financial markets, which will further increase the upside risks to inflation in the coming months.