RBI monetary policy updates: Repo rate unchanged at 6.50%; governor Urjit Patel rules out further rate cuts

Sensex breaches 34,400; Nifty plunges

#MarketAtClose | Downtick continues; #Nifty ends near 10,300 mark. #Sensex breaches 34,400; Midcap Index down more than 430 points.
Indices fall further after @RBI keeps Repo Rate unchanged at 6.50% #RBIPolicy pic.twitter.com/dekdVtqRJe

— CNBC-TV18 (@CNBCTV18Live) October 5, 2018

RBI policy announcement could impact borrowers: Adhil Shetty, Co-founder and CEO, BankBazaar.com

In an unexpected move, the monetary policy committee (MPC) of Reserve Bank of India (RBI) maintained status quo on key rates, with repo rate unchanged at 6.5%. This pause comes after two consecutive rates hikes in June and August. The RBI’s policy mandate is to anchor inflation. Actual inflation at the end of Q2 were below projections at 3.7%. Despite the increase in crude prices and tightening of global financial conditions, the inflation is projected at 3.9-4.5% for the rest of the year and fits within RBI’s target of 4% for consumer price index (CPI) inflation, which could be one of the reasons for holding the rates. The MPC has also changed the stance from ‘Neutral’ to ‘Calibrated Tightening’, indicating that future upward revisions may be possible.

Status quo in the policy rates means  deposit rates would stabilise or marginally increase

Fixed deposits: A status quo in the policy rates means that deposit rates would stabilise or marginally increase. We have recently seen interest rates of small savings schemes for the current quarter go up by 30-40bps. This increase will contribute to driving up the interest rates on bank fixed deposits as well. So, if you are looking for assured returns and safety of capital, small savings are becoming more attractive.

Loans: Though RBI has maintained its stance, some major banks have revised their rates, and more may follow. In such a scenario, your best plan is to try and prepay your loans in part or full. Even a small change in interest rates can have significant impact on your loans, especially in case of long-term loans like home loans, and even a small prepayment can help in a big way.

For instance, if you have a loan of Rs.40L for 20 years at 8.75, your total payable amount would be Rs.84.8L. At the end of three years, your outstanding balance is Rs.37.5L. Assume you repay roughly 10% or Rs.3.5L, your outstanding amount comes down to Rs.33.86L. Even with a 25pbs hike in interest rate, your total outflow would be lower.

RBI Policy works against interest rateparity: Soumen Chatterjee, Director Research, Guiness Securities

Rupee hits all time low at 74 to USD as the policy decision works against Interest Rate Parity. However, RBI’s focus to support Domestic Growth amid Challenging Global Economic Conditions will gradually support Rupee in near-term

Pause to provide temporary relief: Shishir Baijal, Chairman & Managing Director, Knight Frank India

The RBI had hiked the policy rates by 50 bps in the previous two policy reviews. Despite global and domestic macro-economic headwinds of rising interest rates in the U.S., rising crude prices, threat of crude oil fuelled inflation, weaker currency and FII outflows, RBI has paused rate hikes for now. While we are in a rising interest rate cycle now, the pause will provide a temporary relief to the home buyer sentiment and support the festive season demand

Risks to economy has been increased: Anis Chakravarty. economist, Deloitte

The monetary policy committee (MPC) adopted a wait and watch approach in keeping the key policy rate unchanged at 6.5%. This suggests that the current decision may have been taken keeping in mind the need to strengthen macro fundamentals wherein investment and manufacturing have only started seeing some growth. We believe that a consistent rise in interest rates could destabilize the markets, disrupting the price-growth balance.

That said, the risks to economy have clearly increased, with crude prices failing to stabilize and continued rupee weakening having a net negative impact on capital flows.

Current external macroeconomic factors including intensifying geopolitical risks, trade tensions, strengthening dollar and expected tightening of US monetary cycle may pose an upside risk to inflation, going forward besides the fact that anticipated increase in domestic demand is likely to add to domestic price pressures. We believe that the scales of policy rate hike remain tilted to the upside if crude prices and rupee weakening do not show a favourable movement

Rupee touches new low of 74.15

The Indian rupee plunged to a fresh record low of 74.15 to a US dollar on Friday late afternoon, after the Reserve Bank of India (RBI) maintained its key benchmark lending rates. Just after the RBI announced its decision, post 2.30 p.m., the rupee plunged to over 74 a US dollar — the lowest ever mark — it has touched against the greenback.

It opened the day’s trade at the Inter-Bank Foreign Exchange Market at 73.64 (73.6375) to a dollar from its previous close of 73.58. The RBI belied market expectations of a rate hike, which was expected to arrest the free fall in the rupee’s value. 

As per the RBI’s fourth bi-monthly monetary policy statement, the key lending rates have been kept intact on the back of an uncertain global economic scenario.The policy repo rate under the liquidity adjustment facility (LAF) remained unchanged at 6.5 per cent.

– IANS

‘Negative impact expected in the currency market’

Abhimanyu Sofat, Head of Research, IIFL Securities, said RBI policy announcement of keeping rates unchanged is a surprise; this may lead to a negative impact especially the currency market.

With the US yield, inching up to 3.25% it was expected the RBI would increase the rates to protect against inflation rise. We believe because of the policy one should continue to focus on export-oriented &import substitution stories from both the service and manufacturing sector. The presumption of lower inflation due to lower food prices may be a bit in coherent as core inflation may rise due to the depreciating currency. If the crude prices continue to surge then RBI may have to come with front loaded rate increases.

RBI closely monitoring NBFC sector

#RBIPolicy | NS Vishwanathan, Deputy Governor, @RBI says #RBI is closely monitoring the NBFC sector to avoid systemic risk @latha_venkatesh pic.twitter.com/mlECBSeRJp

— CNBC-TV18 (@CNBCTV18News) October 5, 2018

RBI governor rules out further rate cuts

RBI governor Urjit Patel has rules out further rate cuts, saying “calibrated tightening” means a rate cut is off the table.

The governor said govt measures on IL&FS are timely and appropriate, which will help stabilise the situation.

– PTI

Risky move by RBI, says Abheek Barua, Chief Economist, HDFC Bank

This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence currency and asset markets could see sharper corrections. A narrow focus on inflation targets perhaps not desirable in the middle of a financial crisis. Change in stance suggests that the rate hike could still come in the coming months.

Markets extend losses post RBI policy announcement 

BSE Benchmark S&P Sensex down by 904 points or 2.57 percent to 34265. NSE Nifty down by 318 points or 3.00 percent to 10280

Govt welcomes MPC statement

#RBIPolicy | @SecretaryDEA says Government welcomes #MPC statement & decision to keep the rates unchanged. 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 pic.twitter.com/BdIBwuPVfV

— CNBC-TV18 (@CNBCTV18Live) October 5, 2018

RBI to proactively manage liquidity, says dy governor Viral Acharya

Encourage financial firms to raise equity rather than short-term debt, says RBI Deputy Governor Viral Acharya . #RBIPolicy

Read: https://t.co/7cG7ucu1ZF
Watch LIVE: https://t.co/00SoYpJ9hG pic.twitter.com/MlMiUT7Yon

— NDTV Profit (@NDTVProfitIndia) October 5, 2018

Highlights of RBI monetary policy

The following are the highlights of the fourth bi-monthly monetary statement for 2018-19:
 

• RBI keeps key lending rate (repo) unchanged at 6.5 pc
• Reverse repo rate stands at 6.25 pc, bank rate at 6.75 pc, CRR at 4 pc
• Projects retail inflation to rise to 3.8-4.5 pc in October-March
• Retains GDP growth estimate at 7.4 pc for current fiscal
• Global economic activity becoming uneven, outlook clouded by uncertainties
• Excise cut in petrol and diesel will moderate retail inflation
• Rise in oil prices may have a bearing on disposable incomes, dent profit    margins of corporates
• Oil prices remain vulnerable to further upside pressures
• Global, domestic financial conditions tightened, may dampen investment activity
• Exports outlook uncertain
• Fiscal slippage at the centre/state to have a bearing on the inflation outlook, besides heightening market volatility and crowding out private investment
• Inflation outlook needs a close vigil over the next few months, several upside risks persist 
• Trade tensions, volatile and rising oil prices, and tightening global financial conditions pose substantial risks to growth, inflation outlook
• Calls for further strengthening of domestic macroeconomic fundamentals 
• Next meeting of the MPC on December 3-5

Relief for government

Nevertheless, the status quo in RBI key rates will thrill the growth lobby. Particularly, Union finance minister, Arun Jaitley has a reason to smile since yet another consecutive rate hike, and the subsequent upward pressure on the lending rates, would have weighed heavily on consumer sentiments. That would not have been an acceptable idea for the government in an election year.

Rupee thumbs down to RBI

The notable market movement post the policy announcement was not in the equity markets but in the currency. The Rupee tested the psychological 74-mark against the US dollar, indicating that investors weren’t very happy with the Indian central bank lowering the guard on inflation and in the back drop of tightening of policy rates by global central banks. The lack of confidence in the currency market is something one needs to watch out for going ahead. It won’t be a surprise if Rupee tests 75-mark in the near future.

Will engage with IL&FS if necessary: Urjit Patel

Patel said that the central bank will engage with the new management of IL&FS if necessary. RBI deputy governor Viral Acharya said that several measures have been taken to provide adequate system liquidity. Acharya said that the RBI will continue to try and maintain liquidity and that it has already been doing so for the past couple of months. RBI, SEBI and the government are closely monitoring the current liquidity conditions in the country, the deputy governor said.

Further strenthening domestic macroerconomic fundamentals is key: RBI governor Urjit Patel

Stance changed from neutral to calibrated tightening. The real GDP had surged to a new high due to strong expansion in private consumption, tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war. Industrial production accelerated in July 2018, Retail inflation has eased in July and August, Performance of the services sector in the second quarter of the year seems to be somewhat varied,Wage growth in rural and organised sector was contained. Fiscal slippage by Centre or state will have a bearing on inflation outlook. Further strengthening domestic macroeconomic fundamentals is key for MPC.

Rupee breaches 74-mark 

As monetary policy committee kept rates unchanged,rupee breached 74-mark for the first time hitting fresh low of 74.13

But rate hikes not over?

Despite the status-quo in the policy rates, the key word in the policy document is that the central bank is now positioned towards “calibrated tightening’. This is s significant departure from the language off the last policy where the tone as largely towards a neutral stance. This might be an indication that the rate hikes may not be over and is willing to go for a rate later if the situation warrants.

‘Global developments must be factored by the RBI’

The RBI is making a mistake. They should focus on cues from global developments, says an analyst. The crude prices, rupee are major movements globally. We are not living in isolation, he added.

Headline inflation estimated to accelerate to 4.5 per cent

The RBI said that headline inflation is estimated to accelerate to 4.5 per cent by March 2019 quarter with upside risks. The central bank has retaind GDP growth estimate at 7.4 percent for FY19. It will to go up to 7.6 percent in FY20.

RBI decision a big surprise

The RBI decision to opt for a status-quo in its key rates has come as a big surprise. The consensus estimate was tilted toward a quarter percentage point hike in the key Repo rate. The central bank doesn’t seem to be very worried about the inflation pressure ahead after hiking the rate twice since June. It is surprising why the central bank voted 5:1 in favour of pause when there are uncertainties in the global markets, higher crude prices and  locally, rupee, is under heavy pressure

Markets extend losses

The currency markets have not taken well to unchanged rate. The rupee hits 74.01 against the dollar which is the lowest. Nifty is 200 points down

#RBIPolicy | Market slips further as @RBI keeps benchmark repo rate unchanged; #Nifty & midcap index now down nearly 2% pic.twitter.com/3p7EyTqqD0

— CNBC-TV18 (@CNBCTV18Live) October 5, 2018

It is a mistake, says anlayst

The whole world going through a recalibration as far as MPC. India is not living in a vacuum, says an analyst. 

Sajid Chinoy of JP Morgan said the risk to inflation is to the upside and there is a big movement to currency and crude prices.

Five members of MPC vote in favour of status quo 

Regarding the policy repo rate, Dr Pami Dua, Dr Ravindra H Dholakia, Dr Michael Debabrata Patra, Dr Viral V Acharya and Dr Urjit R Patel voted in favour of keeping the policy repo rate unchanged. Dr Chetan Ghate voted for an increase in the policy rate by 25 bps.

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 19 October, 2018.

Central bank keeps repo rate unchanged at 6.50%

CPI inflation seen at 4.8 percent. Post the RBI policy announcement rupee was at record low at Rs 73.85

Financial stability concerns

“I would expect the RBI to change stance. They come to the meeting with close currents. The rupee and credit policy, if tightens, there will be a lot of implications,” Sajid Chinoy of JP Morgan told CNBC TV18.

RBI may not to reduce cash reserve ratio: Bankers 

Bankers do not expect the RBI to reduce cash reserve ratio (CRR), in the upcoming policy, despite liquidity condition remaining tight.

“The RBI has taken a few measures to ease the liquidity condition. I don’t think they will reduce CRR,” said a senior treasury official of a state-run bank.

– PTI

RBI should raise policy repo rate to arrest rupee’s fall: SBI

The SBI, in its research report, Ecowrap, said the RBI should raise the policy repo rate at least 25 basis points to arrest the rupee’s fall. “We rule out a hike of 50 basis points, as it may spook the market. However, there is a probability of change in neutral stance too, as three successive rate hikes with a neutral stance could contradict RBI message,” the research report said.

– PTI

Retreating rupee major concern for policymakers 

“For the RBI, I think it becomes necessary to provide a policy response. The question was only of timing,” said Radhika Rao, economist at DBS in Singapore. “Some would say it (rate hike) could have come sooner … it probably would have been a bit more beneficial. But better now than never.”

If the RBI does raise rates, it would be the latest in a series of emerging market central banks that have been pressured into tightening policy in response to a tumbling currency.

– Reuters

Markets in negative zone ahead of RBI monetary policy 

BSE Benchmark S&P Sensex was down by 426 points or 1.21 percent to 34743 at 2 pm. NSE Nifty down by 175 points or 1.65 percent to 10424.

‘Weaker trend in rupee may prompt RBI to hike rate’

The government has mandated the Reserve Bank to keep inflation within a band of 2-6 per cent.

Experts says the weaker trend in the rupee may also prompt the central bank to raise repo rate. “Given where currency level is at this point of time, I think they will increase the interest rate by a quarter basis points,” HDFC vice chairman and chief executive Keki Mistry said. Tracking global developments, the rupee has become weak and is hovering around 73 against the dollar.

‘RBI may hike repo rate by 25 bps’

“With petrol and diesel prices moving up, there is a strong expectation that inflation will also move up. So, they (RBI) may take a pre-emptive action. I feel there will be an increase of 25 basis points in the repo rate,” Union Bank of India managing director and chief executive Rajkiran Rai G said.

Despite the rise in oil prices, the headline inflation number came down to 3.69 per cent for August as against 4.17 per cent for July.

Rupee recovers 6 paise against US dollar ahead of policy outcome

The rupee recovered 6 paise to 73.52 against the US dollar at the forex market on Friday ahead of the RBI’s monetary policy outcome amid fresh selling by exporters as the government stepped in to reduce oil prices.

Dealers said besides fresh selling of the US dollar by exporters, the greenback’s weakness against some currencies overseas supported the rupee.

The domestic currency closed at a record low of 73.58, down by 24 paise or 0.33 percent on Thursday, marking its third straight session of losses.

– PTI