Rupee slides, markets crash as Reserve Bank pauses

Rupee slides, markets crash as Reserve Bank pauses

Reserve Bank of India (RBI) Governor Urjit Patel attends a news conference at the bank's head office in Mumbai on October 5, 2018. - India's rupee breached 74-mark to the dollar for the first time ever on October 5 as the country's central bank surprised

Contrary to market expectations, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Friday kept repo rates unchanged at 6.5% in its fourth bi-monthly monetary policy review of 2018-19.

The reverse repo rate under the liquidity adjustment facility (LAF) remains at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

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% within a band of +/- 2%, while supporting growth.

RBI retained the country’s gross domestic product (GDP) growth estimate at 7.4% for FY19 and 7.6% for FY20.

Reacting sharply to the policy stance, the rupee depreciated further to breach the 74-mark and touched an intraday low of 74.22 against the US dollar soon after RBI decided to hold on to the rates, owing to the rising crude oil prices.

Investors remained concerned over sustained foreign capital outflows and fears of widening current account deficit in the wake of soaring crude oil prices. At the Interbank Foreign Exchange (Forex) market, the local currency opened higher at 73.56 a dollar against its previous record low closing of 73.58. But, it failed to sustain the initial strength and fell back to breach the 74-mark. Earlier in the day, RBI retained the existing repo rate at 6.5%, as it mooted over the trade-off between inflationary pressure and liquidity issues in the system.

The move comes after two consecutive rate hikes by the apex bank, with earlier two emancipating solely out of inflationary concerns.

The apex bank, in two meetings of monetary policy committee (MPC) for 2018 – June and August, had hiked the bank rate by 25 bps every time.

The decision in favour of retaining the interest rates was voted 5:1 by the six-member MPC of the RBI. The hike is contradictory the market expectations, as crude oil prices have been rising and rupee has been weakening. Most analysts as such had predicted a 25 bps rate hike by RBI. Earlier, on September 27, US Fed Reserve also hiked its Fed Fund Rates by 25 bps. In its last policy review meeting, on August 2, 2018, the Bank of England had also raised the bank rates in UK by 25 basis points.

On the inflationary side, RBI has forcast an inflation of 4.8% in Q1 of fiscal year 2019-20, with upward risks. “Inflation is projected at 4% in Q2 of 2018-19, 3.9-4.5% in H2 and 4.8% in Q1 of 2019-20, with risks somewhat to the upside,” RBI said.

Markets crash

Meanwhile, the bloodbath continued on Indian stock markets, as BSE Sensex tanked by 792.17 points (2.25%) to close at 34,376.99 and NSE Nifty tanked by 282.80 points (2.67%) to close at 10,316.45.

According to analysts, it was has been the surprise move by RBI to hold on to the rates that has prompted this sell off in the afternoon. “Except us, most of the market analysts were predicting a rate hike. So there was a surprise factor, when RBI decided to hold on,” an analyst with market advisory Motilal Oswal told DH.