Reserve Bank India Governor Urjit Patel at the press conference to announce the monetary policy at the RBI head office in Mumbai. Express Photo by Prashant Nadkar Reserve Bank India Governor Urjit Patel at the press conference to announce the monetary policy at the RBI head office in Mumbai. Express Photo by Prashant Nadkar

Contrary to expectations, the Reserve Bank of India (RBI) on Friday maintained status quo on the benchmark interest rate — Repo rate — but changed the monetary policy stance to ‘calibrated tightening’ from ‘neutral’. The financial markets which were expecting a 25-50 basis points hike in Repo rate reeled under selling pressure with the BSE Sensex plunging 792 points to end at a near six-month low of 34,376.99 after the RBI unexpectedly maintained status quo on the policy rate. The rupee crashed below the 74-level against the US dollar for the first time before trading at 73.82 at 4.30 IST.

Global markets also witnessed a sell-off as US Treasury yields surged to multi-year highs on robust economic data and comments from the Federal Reserve, sparking fears of accelerating inflation.

Unveiling the bi-monthly monetary policy, the central bank warned that volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation. Analysts were expecting the RBI’s six-member Monetary Policy Committee (MPC) to raise interest rate by at least a 0.25 per cent, while the developments over the last few days, especially the weakness in the rupee, had led to speculation that the rate hike could be even 50 basis points.

READ | After holding firm, government cuts fuel rates; markets crash as rupee weakens

The repo rate — the rate at which the RBI lends to the system — will continue to be at 6.50 per cent. The MPC voted 5:1 in favour of a status quo, with only one member — Chetan Ghate — voting for a 25 basis points hike.

RBI Governor Urjit Patel said headline inflation is expected to rise to 3.7 per cent by September quarter-end, excluding HRA impact, 3.8-4.5 per cent by second half of the fiscal and 4.8 per cent by the first quarter of the next fiscal. The MPC reiterated its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis. The panel noted 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,” Patel said.

While the projections of inflation for 2018-19 and first quarter of 2019-20 have been revised downwards from the August resolution, its trajectory is projected to rise above the August 2018 print. “The outlook is clouded with several uncertainties. First, the government announced in September measures aimed at ensuring remunerative prices to farmers for their produce, although uncertainty continues about their exact impact on food prices. Secondly, oil prices remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate,’ Patel said.

“Thirdly, volatility in global financial markets continues to impart uncertainty to the inflation outlook. Fourthly, a sharp rise in input costs, combined with rising pricing power, poses the risk of higher pass-through to retail prices for both goods and services. Firms covered under the Reserve Bank’s industrial outlook survey report firming of input costs in Q2 of 2018-19 and Q3,” he said. “Should there be fiscal slippage at the centre and/or state levels, it will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment,” Patel said.

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