Economy

RBI holds key lending rates; repo rate stays at 6.5%

RBI holds key lending rates; repo rate stays at 6.5%”

In a volatile trade at the inter-bank forex market on Wednesday, the rupee opened below the 73-mark at 73.26 against the dollar as it moved in sync with oil prices which at one time breached the $85-per-dollar mark and settled a tad lower at $84.86 per barrel.

The rupee crashed below the 74-level against the United States dollar for the first time ever after the Reserve Bank kept its key policy rate unchanged. Indonesia's central bank governor stressed the need to raise interest rates before the Fed to avoid "drastic" capital outflows in the wake of a heavily flagged Fed hike in December.

The market did not react well to the RBI's decision. The MPC also kept the reverse repo rate the same at 6.25%.

After the Reserve Bank of India (RBI) in its fourth bi-monthly policy this fiscal left the policy rates unchanged and ruled out a rate cut in the rest of the fiscal, the rupee plummeted to 74.13 against the dollar, after opening higher then its previous close at 73.52. Turbulence in global stock and commodity markets and one-way shifts in currency flows in the wake of reversal of quantitative easing increasingly put pressure on the rupee. What happens in the future is important because the RBI's decision on whether or not to hike rates is driven more by expectations of future inflation rather than present levels.

"We rule out a hike of 50 basis points, as it may spook the market".

"Despite a stronger dollar, crude oil prices continued to remain very elevated, which is putting further pressure on current account deficit currencies that rely on oil imports, India and Indonesia specifically", said Khoon Goh, head of Asia research at ANZ. So, will we see them reversing the latest hike - or, will we see something akin to the RBI announcing a hike in rates?

But the central bank said that global commodity prices other than oil have moderated, which should mitigate the adverse influence on input cost. "With the U.S. yield inching up to 3.25 percent, it was expected the RBI would increase the rates to protect against the inflation rise".

The Reserve Bank of India (RBI) lowered its retail inflation projection for the second half of the financial year 2018-19 to 3.9-4.5 per cent.

Rising US interest rates and bond yields have encouraged investors to pull out funds from emerging markets to pocket better returns, analysts said.

So while inflation in India is rising it's being driven by external factors, rather than strength in the underlying economy. "If crude prices continue to surge, then the RBI may have to come with front-loaded rate increases".



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