RBI holds repo, but changes stance to 'calibrated tightening' (Roundup)

Mumbai : Belying market expectations of a rate hike, the RBI on Friday held its key lending rate unchanged in the context of an uncertain global economic scenario but turned hawkish in its stance, moving to one of calibrated tightening from the 'neutral' it has maintained over its six previous policy reviews.

Both government and industry welcomed the central bank pausing on rate hikes.

Announcing the fourth bi-monthly policy review of the fiscal, Reserve Bank of India (RBI) Governor Urjit Patel said the Monetary Policy Committee (MPC) has decided to keep the repo, or the short term lending rate for commercial banks, unchanged at 6.5 per cent.

Elaborating on the change of stance to "calibrated tightening", the Governor said that it implied that "in this cycle, a rate cut is out of the table and we are not bound to increase rates every time we meet."

"With this stance we have two options, we can either increase rates or hold them," he said.

A "neutral" stance allows the RBI to move either way on rates.

In August, the RBI had hiked its repo rate by 25 basis points to 6.50 per cent citing upside risks to inflation.

Elaborating on the decision to hold the repo rate, Patel said that "actual inflation outcomes, especially in August, were below projections as the expected seasonal increase in food prices did not materialise and inflation excluding food and fuel moderated.

"Food inflation has remained unusually benign, which imparts a downward bias to its
trajectory in the second half of the year. Inflation in key food items such as pulses, edible oils, sugar, fruits and vegetables remains exceptionally soft at this juncture."

Retail inflation in August increased 3.69 per cent, slowing from 4.17 per cent in the previous month.

Taking various factors into account, the RBI has lowered its inflation projection for the July-September quarter to 4.0 per cent, and between 3.9-4.5 per cent for the second half of the fiscal "with risks somewhat to the upside."

THe RBI said the inflation outlook is clouded with several uncertainties.

"First, the government announced in September measures aimed at ensuring remunerative prices to farmers for their produce. Secondly, oil prices remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate," it said.

"Volatility in global financial markets continues to impart uncertainty to the inflation outlook. Also a sharp rise in input costs, combined with rising pricing power, poses the risk of higher pass through to retail prices for both goods and services."

According to RBI, since the last MPC meeting in August, global economic activity has remained resilient in spite of ongoing trade tensions, but is becoming uneven and the outlook is clouded by several uncertainties.

"The MPC notes 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," it said.

Five members of the MPC, including the Governor voted for status quo, while one voted for a 25 basis point hike in the repo rate.

Patel also told reporters that the central bank will engage with and support debt-stricken IL&FS in its efforts to salvage the infrastructure financing company.

The key Indian equity indices crashed by over two per cent on Friday as the RBI's changed policy stance from "neutral" to "calibrated tightening", along with a weak rupee and uncertainty in global trade, dented investors risk-taking appetite.

Commenting on the RBI decision, Economic Affairs Secretary Subhash Chandra Garg tweeted: "Government welcomes MPC statement and decision to keep the rates unchanged. 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."

"FICCI welcomes RBI's decision to keep the repo rate unchanged. This move sends positive signal to the industry and is expected to maintain the momentum in investments seen lately. This was especially important in the wake of tightening financial environment in domestic as well as global market," industry chamber FICCI President Rashesh Shah said in a statement.

According to US rating agency Fitch Group subsidiary India Ratings and Research (Ind-Ra), despite the inflation projection being revised downwards, RBI's outlook on inflation is clouded with several uncertainties and the risks are on the upside.

"It could emanate from a number of factors such as fiscal slippage, pass through of higher input costs by companies to retail prices, staggered impact of HRA revision by the state governments besides geopolitical tensions and its impact on crude oil prices. Ind-Ra, therefore, believes that one more rate hike this fiscal is a possibility and cannot be ruled out," Ind-Ra Principal Economist Sunil Kumar Sinha.