RBI keeps repo rate unchanged at 6.50% after two hikes in a row

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The Reserve Bank of India(RBI) in an unexpected move decided to hold the repo rate at 6.50%. The MPC voted 5:1 and RBI committee shifted to ‘calibrated tightening stance’.

Here is RBI policy decision’s full text:

On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) decided to:

• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent.
Consequently, the reverse repo rate under the LAF remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

Key Takeaways

  • MPC keeps repo rate unchanged at 6.5 percent
  • MPC changes stance from neutral to ‘calibrated tightening’
  • Repo rate kept unchanged by a 5-1 vote; Chetan Ghate voted for a rate hike
  • Stance changed by a vote of 5-1; Ravindra Dholakia voted for a neutral stance
  • RBI proposes voluntary retention route for FPIs in debt markets
  • Inflation projected at 3.9-4.5 percent in H2 and 4.8 percent in Q1 of financial year 2019-20
  • GDP growth seen at 7.4% in FY19 & 7.6% in FY20

In the press conference following the MPC decision announcement, RBI Governor Urjit Patel said “it is important to recognise that close to a decade-long extraordinary accommodation by systemic central banks is finally tapering off”.

This inevitable normalisation coupled with the risks stated above has resulted in several quantity and price adjustments in global financial markets. Global trade, according to latest WTO data, is losing pace possibly on account of ongoing tariff wars.

In emerging markets, currency depreciation imposed additional upside inflation risk besides the contagion risks of a technical nature from specific EM episodes and geopolitical developments

The decision of the MPC is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of 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 main considerations underlying the decision are set out in the statement below.
The lack of a rate change has disappointed many experts. Shubhada Rao, chief economist at Yes Bank said to Bloomberg Quint “A rate hike would have atleast calmed the market. On the action front, financial stability has overruled.”

Its clearly surprising for me given the backdrop of macro-economic factors, said Jaideep Iyer, strategy head at RBL Bank. Potentially the role of current financial stability would have played an equally important role in the decisions, he added.

“This has clearly been much against my expectations,” said Amandeep Chopra, Group president and head of fixed income at UTI AMC. “Clearly this is not supportive of keeping rupee anchored and domestic rates market inline with inflation outlook,”he added in an interview with BloombergQuint.

Commenting on the change in stance to calibrated tightening Rao said “October and November were the most difficult months to come by and that’s the time a lot of global issues will play out—a midterm election in U.S. and an OPEC meeting. But having said that, a 25 basis point hike today could’ve calmed the markets. The rupee wouldn’t have been in a hurry to breach 74/$-mark.”

“The rupee seems headed for 75, given that RBI is focusing on flushing the system with liquidity and protecting the financial systems rather than protecting the currency.”
-Saurabh Mukherjea, Marcellus Investment Managers

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