India central bank appears unfazed as rupee stumbles, spurs sell-off
Interest rates stay same as global risk grows
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.
In a surprise decision, the monetary policy committee led by Governor Urjit Patel voted 5-1 to leave the repurchase rate at 6.5 percent on Friday. The decision, which was predicted by just nine of 49 economists in a Bloomberg survey, sparked a selloff in the nation’s currency and stocks.
The Reserve Bank of India’s pause after two hikes since June is in contrast to its peers in Indonesia and the Philippines, who have pressed ahead with aggressive policy action to counter an emerging-market selloff triggered by higher U.S. 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 percent to 4.5 percent for the second half of the year ending March, from 4.8 percent previously, allows the MPC room to pause on rates, he said.
Inflation for now is well below the 4 percent midpoint of the central bank’s target range, even as the economy expands at a world-beating 8 percent 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 cost-push factors should be limited and transient and, as the output gap again turns negative, underlying inflation should converge back toward 4.5 percent.”
While headline inflation has eased in recent months, the core measure, which strips out volatile fuel, food and electricity prices, has been sticky at 6 percent.
The central bank’s September survey on households painted a mixed picture about price pressures. While inflationary expectations for the three months ahead rose sharply by 50 basis points, a year down the line those expectations were lower by 30 basis points compared to the survey in June.
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.
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.