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Financial News: India's Central Bank Retains Key Rate Unexpectedly

India's Central Bank Retains Key Rate Unexpectedly

10/05/2018 - 08:26:00 (RTTNews)

(RTTNews) - India's central bank kept its key benchmark rates unchanged in a surprise decision, on Friday, while shifted its policy stance to "calibrated tightening" from neutral.

The six-member Monetary Policy Committee of the Reserve Bank of India decided to maintain the repo rate at 6.50 percent. The reverse repo rate was retained at 6.25 percent.

Governor Urjit Patel said "calibrated tightening" means that a rate cut is off the table in this cycle.

Five members including Patel voted in favor of keeping the policy rate unchanged. Only Chetan Ghate sought a quarter-point rate hike.

The rupee weakened against the dollar soon after the RBI adopted status quo, setting a new low of 74.23, making it one of the worst performing emerging market currencies.

Indian stock markets have also witnessed strong sell-off in recent days. The Bombay stock exchange's benchmark Sensex shed over 792 points on Friday.

The bank was widely expected to raise the rate to defend the currency. Taking into account inflationary expectations, the bank had raised the benchmark rate by 25 basis points each in June and August.

The MPC reiterated its commitment to achieve inflation target of 4 percent on a "durable basis."

Despite rising crude prices and currency weakness, the RBI lowered its inflation forecast to 3.9-4.5 percent for the second half of the fiscal year 2018-19 from the previous projection of 4.8 percent. The bank projected 4.8 percent for the quarter ending June 2019.

Nonetheless, the bank noted upside pressures to inflation from vulnerable oil prices and volatility in global financial markets.

GDP growth projection for 2018-19 was retained at 7.4 percent, with risks broadly balanced.

Policymakers observed global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to both growth and inflation outlook.

"Uncertainty surrounds the outlook for exports," the bank said.

The bank said tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war.

As the bank flagged several upside risks to the inflation outlook in its accompanying statement and explicitly shifted to a more hawkish formal description of its policy stance, the tightening cycle still has a little further to run, Shilan Shah, an economist at Capital Economics, said.

Following the capital outflows triggered by U.S. Federal Reserve's rate hike, the Philippines and Indonesia had resorted to massive 150 bps rate hike in September.

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