RBI keeps repo rate unchanged at 6.50%, warns volatile oil prices and tightening of global financial conditions pose risk to inflation

Mumbai: The Reserve Bank of India (RBI) Friday unexpectedly maintained status quo on the benchmark interest rate but warned that volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation. The Reserve Bank of India in its fourth bi-monthly policy this fiscal changed the policy stance to ‘calibrated tightening’ from ’neutral’, while affirming its commitment to achieve the medium-term objectives to contain price rise. A majority of the analysts and bankers were expecting the six-member Monetary Policy Committee (MPC) to raise interest rate by at least a 0.25 percent, while the developments over the last few days, especially the weakness in the rupee, had led to speculations that it could be even high as high as 0.50 percent. Soon after the announcement, the rupee breach 74 mark against a dollar for the first time, making imports costlier and posing a threat to current account deficit (CAD). “The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis,” the resolution of the MPC after a three-day meet said. [caption id=“attachment_3734533” align=“alignleft” width=“380”] RBI Governor Urjit Patel. AFP[/caption] The repo rate, at which the RBI lends to the system, will continue to be at 6.5 percent, the reverse repo, at which it absorbs excesss funds, will be at the same level of 6.25 percent. Welcoming the decision of RBI to keep rates unchanged, Economic Affairs Secretary S C Garg said government’s assessment of inflation is in line with the MPC’s assessment. “We believe growth should turn out to be higher than that projected by MPC,” Garg said. The MPC voted 5:1 in favour of a status quo, with only Chetan Ghate voting for a 0.25 percent hike. The resolution said actual inflation outcomes have been ‘below projections’ as the expected seasonal increase in food prices did not materialise and inflation, excluding food and fuel, moderated. Lowering its inflation projections from the August review, the MPC headed by RBI Governor Urjit Patel said headline inflation is expected to rise to 3.7 percent by September quarter-end, excluding HRA impact, 3.8-4.5 percent by second half of the fiscal and 4.8 percent by the first quarter of the next fiscal. He said food inflation, a key component of the inflation basket, has been ‘unusually benign’ and added that the price situation will be influenced by the hike in minimum support prices, global crude prices, second round impact of the HRA allowance for government employees and currency movement. However, the RBI warned that “global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals”. Taking note of the petroleum price cut on Thursday, the MPC said that the recent excise duty cuts on petrol and diesel will moderate retail inflation. The government announced a Rs 2.50 per litre cut in petrol and diesel prices after it reduced excise duty by Rs 1.50 a litre and asked oil companies to absorb another Re 1. In the Monetary Policy Report, the RBI said headline inflation will accelerate to 4.5 percent by March 2019 quarter with upside risks. The hike in minimum support prices for the winter crop has been announced by the government. It said growth will accelerate to 7.4 percent in FY19 from the 6.7 percent in the year-ago period and inch up further to 7.6 percent in the fiscal year after that. Rising protectionist tendancies, threats of currency wars and policy normalisation in the US pose the biggest risks for domestic growth prospects, it said. RBI’s study of professional forecasters put the inflation at 4.5 percent by March quarter and go up further to 5.1 percent by March 2020 quarter. A surge in oil prices to $88 from the present $86 can push the headline inflation number up by 0.20 percent and dent growth by 0.15 percent, it said. The RBI has hiked rates twice in the last two policy reviews by 0.25 percent. The headline inflation for August softened to 3.69 percent in August as 4.17 percent in July. The medium-term target set for the RBI by the government is 4 percent. The six-member MPC led by the RBI governor began its three-day meeting on 3 October. The rupee has been depreciating to new lows as against the US dollar along with the global crude prices breached the $86 to a barrel mark. The government and RBI have taken a slew of measures to arrest the slide, but those have been termed as ineffective by analysts. The rupee depreciation is due to overall strengthening of the US dollar against local currencies, widening of trade and current account deficits due to higher crude prices, portfolio outflows and risk aversion among portfolio investors, it said.