RBI springs surprise, keeps interest rates unchanged
Mumbai, Oct 5 : After back-to-back hike since June, the Reserve Bank of India (RBI) Friday kept interest rates unchanged, surprising markets that had expected a rate hike to support tumbling rupee and combat inflationary pressures from high oil prices.
With five of its six members voting for a status quo, RBI's monetary policy committee (MPC) left repo rate at 6.50 per cent and changed policy stance to 'calibrated tightening' from 'neutral', which RBI Governor Urjit Patel said meant there would be no rate cut in the current cycle.
Vowing to keep the inflation rate under targeted 4 per cent, RBI warned that volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to growth and inflation.
A majority of the analysts and bankers had expected that RBI will raise interest rate by at least a 0.25 per cent with some even rooting for a 0.50 per cent increase in view of the developments over the last few days where rupee had continued to slide and international oil prices hit four-year high.
Soon after the monetary policy announcement, the rupee slid to a new record low, falling past the 74 to a dollar mark, before closing down 0.3 per cent to 73.7650. The domestic unit has fallen 14.5 per cent since January, making it the worst performing major Asian emerging market currency.
"Today's stance of calibrated tightening essentially means that in this rate cycle a rate cut is off the table, and that we are not bound to increase rates at every meeting," Patel told reporters here. "As new data comes in we would look into changing our policies accordingly".
Welcoming the decision of RBI to keep rates unchanged, Economic Affairs Secretary S C Garg said the government's assessment of inflation is in line with the MPC's assessment.
"We believe growth should turn out to be higher than that projected by MPC," Garg said.
The RBI forecasted GDP growth of 7.4 per cent in the current financial year ending March 31, 2019 and 7.6 per cent in the next.
"The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis," the resolution of the MPC after a three-day meet said.
It projected an inflation rate of 4.8 per cent by June 2019, slightly better than the 5.0 per cent August forecast.
The repo rate, at which the RBI lends to the system, will continue to be at 6.5 per cent, the reverse repo, at which it absorbs excess funds, will be at the same level of 6.25 per cent.
The MPC voted 5:1 in favour of a status quo, with only Chetan Ghate voting for a 0.25 per cent hike.
The resolution said actual inflation outcomes have been 'below projections' as the expected seasonal increase in food prices did not materialise and inflation, excluding food and fuel, moderated.
Lowering its inflation projections from the August review, the MPC headed by RBI Governor Urjit Patel said headline inflation is expected to rise to 3.7 per cent by September quarter-end, excluding HRA impact, 3.8-4.5 per cent by the second half of the fiscal and 4.8 per cent by the first quarter of the next fiscal.
He said food inflation, a key component of the inflation basket, has been 'unusually benign' and added that the price situation will be influenced by the hike in minimum support prices, global crude prices, second round impact of the HRA allowance for government employees and currency movement.
However, the RBI warned that "global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals".
Taking note of the petroleum price cut on Thursday, the MPC said that the recent excise duty cuts on petrol and diesel will moderate retail inflation.
The government announced a Rs 2.50 per litre cut in petrol and diesel prices after it reduced excise duty by Rs 1.50 a litre and asked oil companies to absorb another Re 1.
The hike in minimum support prices for the winter crop was announced by the government Wednesday.
Rising protectionist tendencies, threats of currency wars and policy normalisation in the US pose the biggest risks for domestic growth prospects, it said.
RBI's study of professional forecasters put the inflation at 4.5 per cent by March quarter and go up further to 5.1 per cent by March 2020 quarter.
A surge in oil prices to USD 88 from the present USD 86 can push the headline inflation number up by 0.20 per cent and dent growth by 0.15 per cent, it said.
The RBI has hiked rates twice in the last two policy reviews by 0.25 per cent.
The headline inflation for August softened to 3.69 per cent in August as against 4.17 per cent in July. The medium-term target set for the RBI by the government is 4 per cent.
The six-member MPC led by the RBI governor began its three-day meeting on October 3. The rupee has been depreciating to new lows as against the US dollar along with the global crude prices breached the USD 86 to a barrel mark.
The government and RBI have taken a slew of measures to arrest the slide, but those have been termed as ineffective by analysts.
The rupee depreciation is due to the overall strengthening of the US dollar against local currencies, widening of trade and current account deficits due to higher crude prices, portfolio outflows and risk aversion among portfolio investors, it said.
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NATO, others turn down US call for help in Hormuz: Trump
Washington (PTI): President Donald Trump on Tuesday said NATO and most of US' other allies have rejected his calls to help secure the Strait of Hormuz as the war with Iran entered the third week.
In a social media post, Trump asserted that Iran’s military has been “decimated” and he no longer felt the need for assistance from NATO countries or anyone else.
Last week, Trump had sought help from European nations and others who depend on oil supplies transiting from the Hormuz Strait to safeguard the critical waterway.
“The United States has been informed by most of our NATO “Allies” that they don’t want to get involved with our Military Operation against the Terrorist Regime of Iran, in the Middle East, this, despite the fact that almost every Country strongly agreed with what we are doing, and that Iran cannot, in any way, shape, or form, be allowed to have a Nuclear Weapon,” the US President said in a post on Truth Social.
Iran's attacks on Gulf nations and its grip on the Strait of Hormuz, through which a fifth of the world's oil is transported, have sparked increasing concerns of a global energy crisis and are unnerving the world economy.
“I am not surprised by their action, however, because I always considered NATO, where we spend Hundreds of Billions of Dollars per year protecting these same Countries, to be a one-way street — We will protect them, but they will do nothing for us, in particular, in a time of need,” Trump said.
He said Australia, Japan and South Korea too have turned down his call for help.
“Fortunately, we have decimated Iran’s Military – Their Navy is gone, their Air Force is gone, their Anti-Aircraft and Radar is gone and perhaps, most importantly, their Leaders, at virtually every level, are gone, never to threaten us, our Middle Eastern Allies, or the World, again,” Trump said.
He said that given the scale of recent military successes, the US no longer "need" or desires assistance from NATO countries, adding that it never relied on such support in the first place.
Speaking as President of the United States, the "most powerful" country in the world, "we do not need" help from anyone, Trump said.
The West Asia conflict began on February 28 when the US-Israeli combine conducted airstrikes on Iran.
The Strait of Hormuz, the narrow waterway that connects the Persian Gulf to the open ocean, has effectively been shut following the US and Israel attack on Iran and Tehran's sweeping retaliation.
However, Iranian Foreign Minister Abbas Araghchi had said that from Tehran's "perspective", the strait is "open". "It is only closed to Iran's enemies, to those who carried out unjust aggression against our country and to their allies.”
Earlier in the day, a second Indian-flagged LPG tanker, Nanda Devi, reached the country after safely sailing from the war-hit Strait of Hormuz. On Monday, the first ship, Shivalik, reached Mundra port in Gujarat.
As of now, 22 Indian vessels remain on the west side and two on the east side of the strait.
Indian authorities are in constant touch with all the relevant stakeholders in the region to secure the safe passage of the remaining ships, officials said.
