Policy rates haven’t been hiked again. The Reserve Bank decided to take a break from a spree of rate hikes and leave its monetary stance unchanged. The mid quarter policy review kept the key policy rate, the repo at 8.5%. RBI has increased policy rates 13 times since March 2010, amounting to a total of 375 percentage points worth of hikes. But its priorities appear to have changed from combating inflation to maintaining growth. The finance ministry has cut its GDP growth forecast for the fiscal to around 7.5%.
Key economic data that came out during the week may have prompted the decision on rates. On top of that list of worrying data was India’s industrial output. Figures released on Monday showed it had fallen for the first time since the financial crisis of 2008. The index of industrial production plunged 5.1% in October. The previous month it had gone up by 1.9%.
But while industrial output fell, fresh data on Wednesday complicated the picture- with wholesale inflation remaining stubbornly high. The wholesale price index grew 9.11% in November. The previous month it stood at 9.73%.
Meanwhile, India’s weakening rupee is adding new inflationary pressures. The currency took a battering all week until RBI stepped in on Thursday. It sold dollars and held the rupee steady at 53.64. But it also announced new rules to protect it from speculators. For one, it has prohibited the rebooking of forward contracts on the rupee that have been cancelled. It has also slashed the limits for the un-hedged exposure banks can have on the rupee. The effects of the new rules were dramatic. The rupee gained nearly 2% in Friday morning’s trade but slid marginally later on to end at 52.75.