The six-member monetary policy committee led by RBI Governor Urjit Patel voted 5-1 to keep the repurchase rate at 6.5 per cent.
Mumbai: India’s central bank kept interest rates unchanged in a surprise decision as it assesses the impact of its policy tightening so far and tries to contain the fallout of defaults from a systemically important lender.
The six-member monetary policy committee led by Governor Urjit Patel voted 5-1 to keep the repurchase rate at 6.5 per cent on Friday. The decision was predicted by just nine of 49 economists in a Bloomberg survey, with the rest seeing a 25 basis-point increase.
In a clear indication that it’s not yet done with rate increases, the central bank changed its policy stance to “calibrated tightening” from neutral, which had been in place since February 2017.
The decision of the MPC is consistent with the objective of achieving the medium-term inflation target of 4 per cent, while supporting growth, the central bank said in a statement. It lowered the inflation outlook to a range of 3.9 per cent to 4.5 per cent for the second half of the fiscal year ending March from 4.8 per cent seen previously.
“The inflation outlook calls for a close vigil over the next few months, especially because the output gap has virtually closed and several upside risks persist,” the RBI said.
The rupee extended its decline to 0.6 per cent against the dollar after the decision, taking its drop to 14 per cent this year and making it the worst-performing major currency in Asia.
While headline inflation has eased in recent months, the core measure, which strips out volatile fuel, food and electricity prices, has been sticky at around 6 per cent. The RBI forecasts consumer-price growth will accelerate to 4.8 per cent in the first quarter of the fiscal year 2020.
The pause after two hikes since June puts the RBI a step behind peers in Asia, such as Indonesia and the Philippines, which have aggressively tightened policy to counter an emerging-market selloff triggered by higher US rates and a stronger dollar.
The decision by the RBI comes at a time when liquidity conditions have tightened and there are worries that defaults by a systemically important financier could lead to a contagion. Authorities have moved in to ringfence Infrastructure Leasing & Financial Services Ltd. while the RBI has pledged to inject $5 billion through bond purchases as it tries to ease the liquidity squeeze.
Foreigners have pulled $9.7 billion from local shares and debt this year, adding to worries that India will struggle to bridge its swelling current-account deficit. The government has raised import tariffs while the central bank allowed companies to raise more money abroad, but those have done little to stop the slide in the rupee.
On Thursday, the government announced relief to consumers by lowering duties on fuel, a move that puts pressure on budget goals. –Bloomberg
The RBI is in a tough spot. It needs to protect the rupee, fight inflation, but not throw in the towel on growth either. To be perfectly fair, a 25 basis points increase would not have put out the raging fires either. India has been on a 24 / 7 election fighting mode for so long, we seem to have forgotten that there is something called an economy that needs to be helmed, mentored, managed.