Rupee plummets to 74 as RBI holds rates
Central bank move stuns analysts as Indian shares tank
Acrash on Indian stock markets and a decline in the value of the rupee continued unabated yesterday as the Reserve Bank of India (RBI) did not change interest rates or give any hint of market intervention to support the currency.
The Indian rupee ended at a fresh record low of 73.76 per dollar yesterday. It touched a record intra-day low of 74.22 per dollar, but it recovered and ended up 18 paise against the greenback.
The Sensex slumped 966 points to an intra-day low of 34,202.22, while the Nifty tanked over 330 points to an intra-day low of 10,261.90.
Analysts said the RBI decision has come as a surprise.
“The RBI seemed to be influenced by risks to future growth from tighter financial conditions and encouraged by softer inflation projections. In the process the MPC chose to go contrary to the stance of most other Central Banks which may not be conducive for the value of the rupee,” Deepak Jasani, Head of Retail Research at HDFC Securities, said.
India’s central bank stared down the rupee’s slide to a record low, opting to keep interest rates unchanged as it flagged risks to the economy from global monetary policy tightening, trade wars and surging oil prices.
The Reserve Bank of India’s pause after two hikes since June is in sharp contrast to its peers in Indonesia and the Philippines, who have pressed ahead with aggressive policy action to counter an emerging-market sell-off triggered by higher US rates and a stronger dollar. But in a clear indication that it’s not done with rate increases, the RBI changed its policy stance to “calibrated tightening” from the neutral that’s been in place since February 2017.
While the change doesn’t mean that every meeting will result in a rate hike, it does take rate cuts off the table, Governor Patel said. Lowering the inflation forecast to a range of 3.9 per cent to 4.5 per cent for the second half of the year ending March, from 4.8 per cent previously, allows the MPC room to pause on rates, he said.
Inflation for now is well below the 4-per cent midpoint of the central bank’s target range, even as the economy expands at a world-beating 8 per cent plus pace.
“There are already forces at play that we expect will slow activity in coming quarters, including tighter financial conditions, higher oil prices and weaker global growth,” said Sonal Varma, chief India economist at Nomura Holdings Inc. and one of the nine economists who had forecast rates to remain unchanged. “Against this backdrop, the impact of costpush factors should be limited and transient and, as the output gap again turns negative, underlying inflation should converge back towards 4.5 per cent.”
Price rise
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.
Patel appeared unfazed by the sharp drop in the currency, saying the depreciation was helping to correct external imbalances. The RBI doesn’t have any target or band in mind and acts only to manage volatility.
“The unchanged decision suggests that the Reserve Bank of India is not overly concerned about rupee depreciation,” said Mitul Kotecha, a senior emerging-markets strategist at TD Securities in Singapore.
The RBI lowered India’s economic growth projection for the first quarter of fiscal year 2020 to 7.4 per cent from the August projection of 7.5 per cent, while retaining the current year’s forecast at 7.4 per cent.