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Updated on: Wednesday, May 29, 2019, 05:44 AM IST

RBI hits pause button

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Mumbai: After back-to-back hike since June, the Reserve Bank of India (RBI) on 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’ from ‘neutral’, which RBI Governor Urjit Patel said meant there would be no rate cut in the current cycle.

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.

“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 said. “As new data comes in we would look into changing our policies accordingly”. 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.

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It projected an inflation rate of 4.8 per cent by June 2019, slightly better than the 5.0 per cent August forecast. 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. 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’ and added that the price situation will be influenced by the hike in minimum support prices, global crude prices, second round impact of the HRA allowance for government employees and currency movement. However, the RBI warned that “global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals”.

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Taking note of the petroleum price cut on Thursday, the MPC said that the recent excise duty cuts on petrol and diesel will moderate retail inflation. The hike in minimum support prices for the winter crop was announced by the government on Wednesday.
Rising protectionist tendencies, threats of currency wars and policy normalisation in the US pose the biggest risks for domestic growth prospects, it said.RBI’s study of professional forecasters put the inflation at 4.5 per cent by March quarter and go up further to 5.1 per cent by March 2020 quarter.A surge in oil prices to $88 from the present $86 can push the headline inflation number up by 0.20 per cent and dent growth by 0.15 per cent, it said.

Springing surprises

Reverse repo rate stands at 6.25%, bank rate at 6.75%, CRR at 4%

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Reverse repo rate stands at 6.25%, bank rate at 6.75%, CRR at 4%

Projects retail inflation to rise to 3.8-4.5% in Oct-Marchn Retains GDP growth estimate at 7.4% for FY19n Oil prices remain vulnerable to further upside pressuresn Global, domestic financial conditions tightened, may dampen investment activity

Exports outlook uncertain

Fiscal slippage at the centre/state to have a bearing on the inflation outlook

The intent of the Reserve Bank of India’s policy sends signals for supporting growth in the near-term while the policy action is expected to alleviate the liquidity concerns amongst the market participants. RBI has reiterated its commitment to manage inflation at 4% level, while taking care of real economy growth at the same time.
— Dinabandhu Mohapatra,
MD & CEO, Bank of India

A section of banks have a day before the RBI announcement, hiked interest rates. So, will we see them reversing the latest hike – or, will we see something akin to the RBI announcing a hike in rates? The jury’s out on this, we will wait and watch.
— Niranjan Hiranandani,
Founder and CMD, Hiranandani Communities

A surprising status quo on policy rates from RBI amplifies its higher accordance to imparting and restoring financial stability in the near term in the economy. As such, with a  shift of stance from neutral to ‘calibrated tightening’ , we believe that RBI is likely to re-commence rate hiking from the forthcoming policy in December.
— Shubhada Rao,
Group President & Chief Economist, YES Bank 

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Published on: Saturday, October 06, 2018, 10:37 AM IST
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