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Changes policy stance to ‘calibrated tightening’ to indicate that rates can only rise or stay stable hereon in this cycle
Contrary to market expectation, the Monetary Policy Committee of the Reserve Bank of India (RBI) has decided to hold the key policy rate at 6.5% in the fourth bimonthly policy review. However, it changed the stance from neutral to calibrated tightening. The policy announcement weakened the rupee further and sent the Sensex tumbling 800 points. Rate hike expectations were running high after the U.S. Fed increased the rate in the last week of September and also because the rupee was under severe stress. The RBI action seems to indicate that it was more worried about liquidity and hardening of bond yields than inflation as it lowered its forecast.
“The depreciation of the rupee has been in some respects moderate in comparison to several other EME [emerging market economies] peers,” said Urjit Patel, Governor, RBI. “By end-September, the rupee has depreciated in nominal effective terms by 5.6% from end-March. In real effective terms, the rupee’s deprecation has been 5%,” he said, adding that India is not immune to global spillovers from external factors. The RBI lowered inflation forecast to 3.9-4.5% for the second half of the current financial year from the 4.8% projected earlier and to 4.8% for Q1 of 2019-20 from 5%. “While the projections of inflation for 2018-19 and Q1:2019-20 have been revised downwards from the August resolution, its trajectory is projected to rise above the August 2018 print,” the RBI said. The RBI’s decision on focusing on liquidity is expected to have a sobering impact on interest rates, particularly short-term rates. Banks which raised lending rates early this week in expectation of a rate rise, may refrain from further hikes.
“The lingering concerns seem to be around crude oil prices, global interest rates and the ongoing global developments on the trade front. Given the status quo, we expect short-term rates to ease while long-term yields may trade-range bound,” said Lakshmi Iyer, CIO (debt) and head of products, Kotak Mahindra AMC.
Source : https://www.thehindu.com/todays-paper/tp-business/rbi-shifts-gear-from-neutral-but-holds-rates/article25139522.ece
