RBI surprises with status quo, but changes stance to hawkish

07 October, 2018, 17:31 | Author: Eric Barnett
  • Rupee plunges to fresh record low of 73.77 against dollar

Slumping below 74 to reach 74.23 for the first time in its history, the rupee recovered to finally settle at 73.76, 18 paisa below its previous closing of 73.58. Repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.

If the RBI does raise rates, Garg said it could do so in either a "neutral" or "hawkish" manner.

In the RBI's fourth bi-monthly policy announcement, it retained the GDP growth estimate at 7.4 percent for the fiscal year ending in March 2019. This decision was based on headline CPI, which averaged below 4.0% for Jul-Aug'18 compared to RBI's earlier projection of 4.4% in Q2FY19.

Regarding the policy repo rate, 5 members voted in favour of keeping the policy repo rate unchanged.

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. "They are saying there are ways in which the situation could become worse and they would not hesitate to retaliate if the situation worsens".

With speculation growing for steeper interest rate rises, the benchmark 10-year bond yield rose as much as 10 basis points to 8.21 per cent, not far from 8.23 per cent hit in late September which was the highest since November 2014.

Monetary Policy Committee (MPC) started its meeting Wednesday and is expected to arrive at a resolution Friday. Mr. Surendra Hiranandani, Chairman and MD of House of Hiranandani, spoke to Qrius about how sharply the currency and equity market reacted as soon as another rate hike was anticipated to curb inflationary pressures. In August 2018, consumer inflation clocked in at 3.69%, which is well within the RBI's inflation target.

Both government and industry welcomed the central bank pausing on rate hikes. The rupee has been in freefall in the year so far owing to capital outflows as foreign investors rerouted funds from emerging markets like India to safe havens like the United States, where the Federal Reserve is tightening rates.

Global oil prices have been on a boil, hurting the rupee, as India imports almost 80 per cent of its crude requirements.

A weaker currency and higher oil prices are putting upward pressure on inflation, although domestic financial conditions are already tight.

"Thirdly, volatility in global financial markets continues to impart uncertainty to the inflation outlook". Until the troubles surfaced to batter local markets around two weeks ago, the consensus was biased towards a 25 basis point hike at the next meeting.

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.



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