On Friday the Reserve Bank of India (RBI) kept interest rates unchanged in a surprise decision, opting to assess the impact of previous increases and contain the fallout of defaults from a systemically important lender. The six-member monetary policy committee led by Governor Urjit Patel voted 5-1 to keep the repo rate at 6.50%.
The six-member monetary policy committee led by Governor Urjit Patel voted 5-1 to keep the repurchase rate at 6.50% on Friday. The decision was predicted by just nine of 49 economists in a Bloomberg survey, with the rest seeing a 25 basis point increase.
In a clear indication that it’s not yet done with rate increases, the central bank changed its stance to “calibrated tightening” from neutral that was in place in since February 2017.
The decision of the MPC is consistent with the objective of achieving the medium-term inflation target 4%, while supporting growth, the central bank said in a statement,
A recent slowing in inflation helped the RBI hold fire after raising rates twice since June. The pause also puts it a step behind peers in Asia, such as Indonesia and the Philippines, who have aggressively tightened policy to counter an emerging-market selloff triggered by higher US rates and a stronger dollar.
The rupee extended its decline to 0.6% after the decision, taking its drop against the dollar to 14% this year and making it the worst-performing major currency in Asia.
The decision by the RBI comes at a time when liquidity conditions have tightened and there are worries that defaults by a systemically important financier could lead to a contagion. Authorities have moved in to ringfence Infrastructure Leasing & Financial Services Ltd. while the RBI has pledged to inject $5 billion through bond purchases as it tries to ease the liquidity squeeze.
Foreigners have pulled $9.7 billion from local shares and debt this year, adding to worries that India will struggle to bridge its swelling current account deficit. The government has raised import tariffs while the central bank allowed companies to raise more money abroad, but those have done little to stop the slide in the rupee.
On Thursday, the government announced relief to consumers by lowering duties on fuel, a decision which is likely to impact the budget gap at the margins.
The sustained weakness in the rupee and rising cost of imports, especially fuel, forced the central bank to raise its inflation projections on Friday. It now expects inflation in a range of 3.9% to 4.5% in the second half and 4.8% in the first quarter of the fiscal year 2020.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.