RBI keeps repo rate on hold but shifts stance to ‘calibrated tightening’
The monetary policy committee of the RBI voted 5:1 for change of stance to ‘calibrated tightening’.
Last Modified: Mon, Oct 08 2018. 01 27 PM IST
- 3:01 pm ISTRBI retains GDP growth projection for 2018-19 at 7.4%
- 2:46 pm ISTRupee crosses 74/dollar, Sensex down 500 points after RBI policy announcement
- 2:30 pm ISTRBI changes stance to ‘Calibrated Tightening’
- 2.17 pm ISTFund managers raise cash holding ahead of RBI policy review
- 1.44 pm ISTHow RBI rate hike could impact borrowers?
- 1.30 pm ISTWill RBI revise its inflation target?
- 1.25 pm ISTIL&FS crisis and RBI liquidity infusion
- 1.17 pm ISTWill RBI hold on to neutral stance?
- 1.10 pm ISTSensex on edge ahead of RBI policy review
- Mumbai: In a surprise move, the RBI today kept its repo rate, the rate it lends to commercial banks, unchanged at 6.5%. Many analysts had expected a rate increase to combat inflationary pressures arising from high oil prices and a weakening rupee. The monetary policy panel shifted its policy stance to ‘calibrated tightening” from ‘neutral’. Five of the six panel members voted to leave the rate unchanged.
- 3:01 pm IST RBI retains GDP growth projection for 2018-19 at 7.4%Here are highlights from RBI’s monetary policy statement on growth outlook:
1) Private consumption has remained robust and is likely to be sustained even as the recent rise in oil prices may have a bearing on disposable incomes.
2) Improving capacity utilisation, larger FDI inflows and increased financial resources to the corporate sector augur well for investment activity.
3)However, both global and domestic financial conditions have tightened, which may dampen investment activity. Rising crude oil prices and other input costs may also drag down investment activity by denting profit margins of corporates.
4) This adverse impact will be alleviated to the extent corporates are able to pass on increases in their input costs. Uncertainty surrounds the outlook for exports. Tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war.
5) GDP growth projection for 2018-19 is retained at 7.4%
- 2:30 pm IST RBI changes stance to ‘Calibrated Tightening’MPC votes 5:1 for change of stance to ‘Calibrated Tightening’. Regarding the stance, Dr. Pami Dua, Dr. Chetan Ghate, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of changing the stance to calibrated tightening. Dr. Ravindra H. Dholakia voted to keep the neutral stance unchanged. The minutes of the MPC’s meeting will be published by October 19, 2018. The next meeting of the MPC is scheduled from December 3 to 5, 2018.
- 2.17 pm IST Fund managers raise cash holding ahead of RBI policy reviewFund managers are increasing the amount of cash they are holding ahead of the RBI decision, a Bloomberg report said, in expectation of an increase in borrowing cost. The RBI’s comments on outlook for inflation and economic expansion in view of the soaring oil prices and a weakened rupee will be closely watched. “We’ve raised cash in our portfolios and our focus is to identify quality franchises that are approaching cheap valuations, particularly in the consumer space,” said Sunil Sharma, who oversees $1 billion of assets as chief investment officer at Sanctum Wealth Management. Investors will also be watching whether the RBI will drop its neutral stance in place since February 2017.
- 1.44 pm IST How RBI rate hike could impact borrowers?Many banks, including SBI and HDFC, had hiked interest rates for borrowers days ahead of the RBI policy review, resulting in higher EMIs on home loans. A 25 basis point repo rate hike today to 6.75% from RBI would mean a 75 basis point rise since June, the steepest increase since the last tightening cycle, between September 2013 and January 2014. While a majority of analysts expect a quarter-point raise, some analysts said they would not be surprised if there’s a 50 bps increase, given surging oil prices and the rupee’s battering. The 10-year benchmark bond yield has risen by 50 basis points to 8.20 percent since the last policy-making meeting in August.“The RBI is ready to keep real rates high because the policy mandate is to anchor inflation,” said Anindya Banerjee, deputy vice president, currency derivatives at Kotak Securities. “The biggest policy anchor for rupee is high real rates. Raising the repo rate will increase the real interest rates and help in attracting fresh foreign inflows which will help in containing the rupee.”
- 1.30 pm IST Will RBI revise its inflation target?Analysts expect the inflationary pressure to increase going forward amid a weakening rupee and surging global oil prices. The retail inflation rate was 3.69% in August but is expected to go above the RBI’s projected 5% by June 2019 on higher fuel prices, the weak rupee and strong consumer spending.
- 1.25 pm IST IL&FS crisis and RBI liquidity infusionThe IL&FS debt problems have pushed up short-term interest rates sharply with one-year commercial paper rising by nearly 70 basis points to 9.20% since early August, while the one-year treasury bill rate is up 50 bps to 7.73%.To alleviate cash crunch fears, the RBI has unexpectedly outlined a large bond purchase programme worth Rs 34,000 crore for October on top of Rs 20,000 crore of purchases last month. IL&FS has missed more debt obligations, even as the government pledged to prevent further defaults, according to a latest Bloomberg report. IL&FS failed to service principal and interest on loans from banks, inter-corporate deposit and commercial papers totaling Rs 33.9 crore due for the period from September 30 to October 4.
- 1.17 pm IST Will RBI hold on to neutral stance?Analysts would be closely watching the stance of the RBI, which the central bank had maintained as neutral despite back-to-back rate hikes in June and August. The next domestic trigger for the rupee would be the tone of the RBI policy, said Abhishek Goenka, CEO of IFA Global, ahead of the policy announcement. RBI is expected to “provide assurance about durable liquidity,” predicted A. Prasanna, chief economist at ICICI Securities Primary Dealership. DBS economist Radhika Rao expects a rate hike, along with the RBI shifting its stance to “hawkish” from “neutral”.
- 1.10 pm IST Sensex on edge ahead of RBI policy reviewThe Sensex and the Nifty 50 were down sharply ahead of the RBI policy announcement. The Sensex was down 469 points, while the Nifty 50 was trading at 10,421. The selloff was broad-based with the BSE MidCap and SmallCap indices falling 1.58% and 1.29%, respectively. The rupee was trading 0.09% down at 73.65 a dollar, as compared to Thursday’s close of 73.58. A rate hike could make domestic yields on debt more attractive for foreign investors and contain inflationary pressures from high crude prices as India imports more than two-thirds of its oil needs. So far this year rupee has declined over 13%. Foreign investors have sold $2.44 billion and $7.26 billion in the equity and debt markets, respectively.
First Published: Fri, Oct 05 2018. 01 44 PM IST
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