RBI KEEPS RATES UNCHANGED - THIS WAS OUT-OF-THE-BOX!

The RBI kept the rates unchanged! The best thing to have done – exactly what we had said in our Cover Feature yesterday! An unbashful pat on our backs too!

As against the consensus of 25 bps and 50 bps rate hikes, this status quo is exactly what will work best right now. Given the uncertainty all around, created more so in the financial sector due to the turmoil at IL&FS, more unsettling was not required.

The markets were thrilled initially – just a second before the policy was announced, the BSE was down 389 points and then it recovered to a 291 points fall, fell down to almost 549 points and then recovered to 400 levels. The rupee though is seeing only a one-way road - sell-off. The money market managers wanted a rate hike and when that did not come, rupee fell to below Rs.74/dollar.

There are analysts saying very gravely that this is a big mistake as a rate hike was the thing to be done, what with USA also on rate hike cycle. But what the USA does not work for us; so equating them to us would not be right. This is the not like the last MPC meet; there are more to come and a decision could be taken later. If USA is scheduled to go for another rate hike in Dec, it is indeed prudent as of now to hold on to the rates.

The MPC changed its stance from “neutral” to “calibrated tightening.” Now that sounds so much American! Urjit Patel at the Press Conference explained that calibrated tightening means that rate cuts are off the table but rate hikes will come as and when required based on the economic data.

But the question is – will a rate hike alone help save the falling rupee? How can RBI rescue the rupee with a rate hike when its prime duty is to keep an eye on inflation?  If the rupee does not stabilize, maybe RBI will need to step in with more ideas, beyond rate hike in the near future.

Highlights of the RBI Policy:

• Repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent.
• Reverse repo rate under the LAF remains at 6.25 per cent
• Marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.
• The decision of the MPC is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
• CPI inflation is projected at 4.0 per cent in Q2FY19; 3.9-4.5 per cent in H2 and 4.8 per cent in Q1FY20, with risks somewhat to the upside.
• GDP growth projection for 2018-19 is retained at 7.4 per cent as in the August resolution (7.4 per cent in Q2 and 7.1-7.3 per cent in H2), with risks broadly balanced.
• Though inflation is projected downwards, the trajectory is projected to rise based on risks of hike in MSPs for farmers, forex volatility, oil prices, increase in input costs, fiscal slippages and staggered impact of HRA hike.
• Regarding the policy repo rate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of keeping the policy repo rate unchanged. Dr. Chetan Ghate voted for an increase in the policy rate by 25 bps.
• The next meeting of the MPC is scheduled from December 3 to 5, 2018.

This policy maintaining a status quo is the best thing to have done as given the global headwinds currently, there is an urgent need to repair domestic macro economics. A rate hike at this juncture would have depressed the demand further, more so during the festive season. RBI does see a threat to inflation going up but as of now, it seems to be under control. RBI need not wait till Dec if inflation warrants a rate hike.

We have too much turmoil as such to deal with; it’s good that today was a day of status quo. Being disappointed that there is no storm only because we were mentally prepared is illogical.

The markets will continue to watch the rupee and oil; that will pretty much dominate the trading moods. Yes, earnings season have come calling and that too will dictate moods. Let’s just hope that the markets are bottoming out….