India's Central Bank Retains Key Rate Unexpectedly

Rupee plunges to fresh record low of 73.77 against dollar

The Reserve Bank of India (RBI) surprised the markets Friday by keeping its key policy rate - the repo rate - unchanged after two back-to-back hikes while indicating that it could raise interest rates down the line, a stance which led to a sell-off in stocks even as the rupee weakened further. "However, there is a probability that the central bank would change the stance from "neutral" too, as three successive rate hikes with a "neutral" stance could contradict the RBI message", the report said.

The MPC said the GDP is expected to grow by 7.4 per cent in 2018-19, up from 6.7 per cent in the previous fiscal.

"The RBI voting for a pause indicates that there is an attempt on its part to address the domestic macroeconomic fundamentals to tackle headwinds in the global market".

The reverse repo rate stayed at 6.25 percent.

The Reserve Bank of India's (RBI) pause after two hikes since June is in contrast to its peers in Indonesia and the Philippines, who have pressed ahead with aggressive policy action to counter an emerging-market selloff triggered by higher U.S. rates and a stronger dollar. "RBI does not appear to be inclined to lift rates just to protect (the Indian rupee) unless there is clear evidence that a weaker currency has pushed up imported inflation".

Forty out of 49 economists surveyed by Bloomberg News had predicted a rise of 25 basis points.

The Indian rupee breached the 74-mark at the end of Friday, which according to RBI governor Urjit Patel, is still a better performance than its peers.

"The hold on policy rates has come against the market expectation of a 25 bps rate hike".

Since the last MPC meeting in August, the rupee has fallen 7 percent and Brent crude oil prices have risen more than 15 percent.

"The key takeaway is that the MPC remains focused on inflation control".

The lowering of inflation risks were exclusively based on food inflation momentum which according to RBI over weights increase in household expectations, higher input & selling prices, sharp increase in crude oil prices and currency depreciation by ~6%. "The RBI is clearly of the view that they should let underlying trade competitiveness improve gradually as the trade-weighted exchange rate acts as a natural stabiliser". Market will also be watching whether the RBI announces any measure to stabilise the rupee. A rate increase would have helped curb inflation fuelled by the rupee's weakness and surging crude prices, helping strengthen the economy. In August 2018, consumer inflation clocked in at 3.69%, which is well within the RBI's inflation target.

Going forward, the outlook for inflation will be shaped by several factors, said the MPC in its statement.

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