Cen­tral bank main­tains sta­tus quo in sur­prise move, changes pol­icy stance

The mon­e­tary pol­icy com­mit­tee low­ered its in­fla­tion pro­jec­tion to 3.9-4.5% from 4.8% for the sec­ond half of the cur­rent fis­cal

Mint Asia ST - - News - BGY OPIKA G OPAKUMAR

Af­ter two suc­ces­sive rate hikes, the Re­serve Bank of In­dia’s (RBI) mon­e­tary pol­icy com­mit­tee (MPC) kept key pol­icy rates un­changed on Fri­day, 5 Oc­to­ber, cit­ing a be­nign in­fla­tion tra­jec­tory and down­ward re­vi­sion to in­fla­tion pro­jec­tions, though the stance changed from neu­tral to “cal­i­brated tight­en­ing”.

The pause, com­bined with the stance, spells uncer­tain times for con­sumer fi­nance and home-buy­ers. Banks are still likely to in­crease lend­ing rates, thereby af­fect­ing bor­row­ers’ EMI pay­ments. Many banks are ex­pected to re­set their lend­ing rates over the next few weeks to align them with RBI’S two pre­vi­ous in­ter­est rate in­creases. In ad­di­tion, the stance of “cal­i­brated tight­en­ing” may force banks to keep their hands on the in­ter­est rate lever.

The six-mem­ber MPC voted 5-1 to keep the repo rate un­changed at 6.5%. For the first time, RBI ex­ec­u­tive direc­tor Michael Pa­tra, known to be the MPC’S most hawk­ish mem­ber, voted in favour of a pause, while call­ing for a shift in stance to cal­i­brated tight­en­ing. Govern­ment­nom­i­nated Chetan Ghate was the only one of the six mem­bers to vote for a 25 ba­sis points (bps) in­crease in the pol­icy rate. One ba­sis point is a hun­dredth of a per­cent­age point.

The vote for the change in stance was also 5-1 with mem­ber Ravin­dra Dho­lakia root­ing to keep the neu­tral stance un­changed.

The mar­kets were sur­prised by the sta­tus quo on rates be­cause it is at vari­ance with global cen­tral bank rate ac­tions. Mar­kets were also dis­ap­pointed with the pol­icy state­ment fail­ing to in­clude any con­crete mea­sures on the ru­pee or pro­vid­ing a heal­ing touch to the sys­temic in­sta­bil­ity posed by non-bank­ing fi­nance com­pa­nies (NBFCS).

The rate ac­tion was con­trary to ex­pec­ta­tions of econ­o­mists sur­veyed by Mint. Gov­er­nor Ur­jit Pa­tel said in a press con­fer­ence that rate cuts were off the ta­ble in the cur­rent rate cy­cle and that the cen­tral bank wouldn’t hike rates at ev­ery meet­ing. How­ever, the changed stance has in­creased the pos­si­bil­ity of fur­ther rate hikes, with in­fla­tion data be­ing the de­cid­ing fac­tor.

The cen­tral bank flagged off a list of up­side risks to in­fla­tion even as it slashed its fore­cast for the head­line num­ber.

The MPC said the key risks to do­mes­tic prices come from volatile global fi­nan­cial mar­kets, surg­ing oil prices and pos­si­ble fis­cal slip­pages in the run up to elec­tions—five state assem­blies go to the polls be­fore gen­eral elec­tions next year.

“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,” said the pol­icy state­ment.

The MPC low­ered its in­fla­tion pro­jec­tion to 3.9-4.5% from 4.8% for the sec­ond half of the cur­rent fi­nan­cial year.

The rate-set­ting panel also high­lighted its con­cerns on a pos­si­ble growth slow­down on ac­count of sev­eral head­winds, in­clud­ing high oil prices, volatile global fi­nan­cial mar­kets, in­ten­si­fy­ing trade wars and grow­ing un­cer­tainty in the do­mes­tic fi­nan­cial land­scape.

The panel re­tained the gross do­mes­tic prod­uct (GDP) es­ti­mate for the cur­rent year at 7.4% and pegged FY20 GDP at about 7.6%.

“We be­lieve in­fla­tion is ex­pected to over­shoot RBI’S es­ti­mate in sec­ond half by 20-30bps. Ad­di­tion­ally, tight­en­ing global fi­nan­cial con­di­tions may fur­ther weigh on ru­pee. We con­tinue to ex­pect 25-50bps of rate hikes in the rest of FY19 to en­sure fi­nan­cial sta­bil­ity amid global and do­mes­tic head­winds,” said Upasna Bhard­waj, se­nior economist, Ko­tak Mahin­dra Bank.

The de­ci­sion by the MPC to pause on pol­icy rates comes at a time when liq­uid­ity con­di­tions have tight­ened and there are wor­ries that de­faults by In­fra­struc­ture Leas­ing and Fi­nan­cial Ser­vices Ltd (IL&FS) could lead to a con­ta­gion.

Ac­cord­ing to Ab­heek Barua, chief economist at HDFC Bank, the hold on pol­icy rates could well keep do­mes­tic bond yields and in­ter­est rates in the whole­sale mar­ket un­der check, help­ing NBFCS which are fac­ing a liq­uid­ity crunch. How­ever, Barua added that the mar­ket was ex­pect­ing the MPC to use the rate hike to de­fend the ru­pee.

“The risk of not con­tain­ing the de­pre­ci­a­tion pres­sures on the ru­pee al­lows the spillover to other as­set classes like eq­ui­ties to con­tinue. This could make the case for a hike and a stronger com­mu­ni­ca­tion. How­ever, the RBI has made a clear choice and un­der­played this risk,” Barua said.


Cal­i­brated tight­en­ing: RBI gov­er­nor Ur­jit Pa­tel.

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