RBI keeps policy rates unchanged, shifts stance to 'calibrated tightening'

The central bank indicated it was in no mood to stop the rupee slide in order to preserve the country's export competitiveness

The Reserve Bank of India (RBI) on Friday surprised the markets by keeping the policy rates unchanged even as it shifted its stance to “calibrated tightening”.

The central bank indicated it was in no mood to stop the rupee slide in order to improve the country’s export competitiveness.

The six-member monetary policy committee (MPC) of the RBI voted five to one to maintain the status quo.

Chetan Ghate voted for a rate hike while Ravindra Dholakia voted to keep the policy stance unchanged at “neutral”.

The policy rate stands at 6.50 per cent, and will only go up from here. At its peak in this cycle, the policy rates were at 8 per cent in January 2015. The RBI moved to the neutral stance from “accommodative” in the February 2017 policy.

“Today’s stance of ‘calibrated tightening’ essentially means that in this cycle, a rate cut is off the table and that we are not bound to increase rates at every meeting because that is not required, given our inflation outlook and forecasts at this point in time,” said Urjit Patel in a post-policy conference. 

In his opening statement, Patel said allowing flexible exchange rate adjustments, without undue volatility, would help the “reorient current account balance given revised terms of trade”.

Deputy Governor Viral Acharya said: “[T]he RBI’s stated policy has always been to manage undue volatility rather than a very specific level, and as the governor already articulated, exchange rate adjustment is an important part of how your economy adjusts to trade shocks.” 

The rupee slid past the 74 a dollar level to reach the day’s low of 74.23, but was brought up by heavy intervention to close at 73.76 a dollar against its previous close of 73.58.

The Sensex plunged 967 points amid a sharp sell-off in financial stocks, but recovered to close at 34,377, down 792.2 points, or 2.25 per cent.

The bond yields, however, recovered sharply responding to the status quo. The bond market was certain the RBI was going for a hike of at least 25 basis points.

The yields on the 10-year bond closed at 8.02 per cent from 8.157 per cent a year ago. 

Without committing himself on whether lending rates would go up, State Bank of India (SBI) Chairman Rajnish Kumar said the RBI decision to keep the policy rate unchanged while changing the stance to calibrated tightening “seems to be dictated purely by a benign inflation trajectory and considering the rising uncertainty in global markets, possible weakening in global trade and financial stability considerations”.

The RBI could also be falling behind the curve in Asia, economists said.“The RBI’s stance of keeping rates on hold runs counter to the emerging markets tightening bias, in the face of rising US rates,” said Radhika Rao of DBS Bank. 

Nomura economist Sonal Varma said: “The MPC’s decision to stand pat is a clear signal that inflation remains the anchor of monetary policy. Interest rates will not be used to manage the currency, but the MPC will respond to the inflationary consequences of depreciation.” 

The policy document said growth was on a firm footing while the inflation rate was declining for now, with the food inflation rate remaining “unusually benign”. 

However, the RBI was concerned about the rise in crude oil prices, which have firmed up by $13 a barrel since the August policy. Volatility in international financial markets may also put pressure on prices, the RBI warned. 

The central bank lowered the inflation projection to 4 per cent in the second quarter of 2018-19, 3.9-4.5 per cent in the second half and 4.8 per cent in the first quarter of the next financial year. The earlier projections on these counts were 4.6 per cent, 4.8 per cent and 5 per cent, respectively. The projections include the impact of house rent allowance, which is dissipating gradually. 

The RBI governor said the excise duty cut in fuel prices must have been factored in when the government announced it would keep the fiscal deficit at 3.3 per cent of gross domestic product. 

The RBI officials allayed fears about the contagion of the IL&FS debacle.

"The measures taken by the government are apt and the RBI will engage with the new management of IL&FS, if necessary, for any assistance," said Patel in his opening statement.

In the post-policy conference, Deputy Governor N S Vishwanathan said the RBI was closely monitoring the sector, and the “NBFC (non-banking finance company) sector overall is quite strong and the regulatory framework is robust.” However, the NBFCs must get out of their habit of financing their long-term needs by raising short-term funds, said Acharya.

“Chasing lower marginal costs of funding in order to acquire or retain market share in lending is a myopic strategy,” Acharya said.

Photo: Kamlesh Pednekar