RBI may hike repo rate by 25 bps on Friday

Gladys Abbott
October 7, 2018

This policy review arrives at a time when oil prices and US interest rates are at an all-time high, the Indian rupee is at a record low pressured by a widening current account deficit, making credit markets nervous.

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

The six-member MPC led by the RBI governor began its three-day meeting on October 3. While a 25 basis points hike in repo rate is a given, the market may be keenly awaiting other measures by the RBI to shore up rupee. Reverse repo rates also stayed unchanged at 6.25%.

The MPC (Monetary Policy Committee) statement of keeping the rates unchanged has come as a pleasant surprise to everyone since there was a consequent hike during the last two meetings.

India's rupee declined and stocks entered a correction after the central bank kept interest rates unchanged, surprising investors who expected the authority to step up its defense of Asia's worst-performing major currency.

Elaborating on the change to "calibrated tightening", the Governor said that it implied that "in this cycle, a rate cut is not the table and we are not bound to increase rates every time we meet".

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By the end of September, the rupee has depreciated in nominal effective terms by 5.6 per cent since the end of March, Patel said.

"Fifthly, should there be fiscal slippage at the centre and/or state levels, it will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment".

Defending the decision, the bank said it was acting "to further strengthen domestic macroeconomic fundamentals".

Patel listed several risks and uncertainties which are clouding the economic horizon. "This is surprising and contrary to the industry's expectations, which skewed more towards an increase on the back of increasing inflation and depreciation of the rupee", said Anuj Puri, the chairman of ANAROCK Property Consultants.

"Fourthly, a sharp rise in input costs, combined with rising pricing power, poses the risk of higher pass through to retail prices for both goods and services".

The GDP growth projection for 2018-19 is retained at 7.4 per cent as in the August resolution. The Reserve Bank of India (RBI) had on Wednesday allowed oil-marketing companies to raise dollars directly from overseas markets without a need for hedging.

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