RBI�s status quo on rate risky? Check out the key takeaways
RBI�s status quo on rate risky? Check out the key takeaways
Most analysts and bankers were expecting at least 25 basis points hike in policy rate. Abhimanyu Sofat, Head of Research, IIFL Securities, said the RBI policy announcement of keeping rates unchanged is a surprise, this may lead to a negative impact especially the currency market.�
Going against consensus estimates, the Reserve Bank of India (RBI) on Friday s urprised markets, by maintaining status quo on policy rate at the bimonthly policy review. The central bank cites benign outlook for price rise for its decision.?
The Monetary Policy Committee (MPC) voted 5:1 in favour of a status quo, with only Chetan Ghate voting for a 25 basis points rate hike.?
However, the committee changed the stance to hawkish, to focus on ???calibrated tightening??? against ???neutral??? earlier.?
RBI governor Urjit Patel said the MPC was not bound to hike rates at every meeting. ???The committee???s interest rate calls exclusively focused on its mandate. The ???calibrated tightening stance??? is apt, given the financial conditions.????
Most analysts and bankers were expecting at least 25 basis points hike in policy rate. Abhimanyu Sofat, Head of Research, IIFL Securities, said the RBI policy announcement of keeping rates unchanged is a surprise, this may lead to a negative impact especially the currency market.?
???With the US yield inching up to 3.25 per cent, it was expected that RBI would increase the rates to protect against inflation rise,??? he said.?
Below are the key takeaways from the monetary policy outcome:?
What does change in stance mean?
The change in stance from ???neutral??? to ???calibrated tightening??? is indicative of the likely tightening to come depending on evolving data. RBI Governor Urjit Patel said this stance clearly signals that a rate cut is off the table. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said RBI???s surprising policy announcement is the consequence of its confidence on benign inflation, which in turn, stems from the softening of food prices. ???Since the Indian economy, like many other emerging markets are currently in the cross currents of global developments, RBI is likely to be on guard keeping a strong vigil of the US 10-year bond yield and crude prices,??? he said.?
How will it impact you pocket?
There may be some pressure on financial markets, as the decision came against expectations. However, it will not change your monthly loan instalments. Jaxay Shah, President, CREDAI National, said RBI???s decision to keep the repo rate unchanged is a relief to the developers, home buyers and real estate stakeholders at large. However, the economy is too precariously poised for real estate to pull itself by its bootstraps. ???We hope for decisive steps to end the credit freeze,??? he said.?
Growth target retained
RBI has retained the GDP growth estimate at 7.4 per cent for FY19. It expects economic growth to accelerate to 7.6 per cent in FY20.?
RBI focussed on inflation target?
The MPC reiterated its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis. ???The presumption of lower inflation due to lower food prices may be a bit incoherent, as core inflation may rise due to the depreciating currency. If crude prices continue to surge, then RBI may have to come with frontloaded rate increases,??? said Sofat.?
Abheek Barua, Chief Economist at HDFC BankNSE -0.09 %, said RBI???s narrow focus on inflation target perhaps was not desirable at this stage. ???This is a risky move by RBI since the market was positioned for a rate hike, purely as rupee defence,??? he said.?
Key risks as RBI sees them
The MPC noted that global headwinds in the form of escalating trade tensions, volatile and rising oil prices and tightening global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals, it said????
Outlook on crude, gold & base metals
Growth in global trade is weakening as reflected in export orders and automobile production and sales. Crude oil prices eased during the first half of August amid concerns of reduced demand from emerging markets economies due mainly to the spillover from country-specific turmoil and accentuated by rising supplies. However, prices rebounded on expectation of reduced supplies due to sanctions on Iran and falling US stockpiles. Base metal prices witnessed selling pressure in anticipation of weak demand from major economies. Gold prices continued to slide lower on a strong US dollar, though they recovered somewhat on safe haven demand from the mid-August lows.?
Global economy as viewed by MPC
Since the last MPC meeting in August 2018, global economic activity has remained resilient in spite of ongoing trade tensions, but is becoming uneven and the outlook is clouded by several uncertainties, RBI said. The central bank further said among the advanced economies, the US appeared to have sustained pace in Q3 of 2018 as reflected in strong retail sales and robust industrial activity. In the euro area, economic activity remained subdued due to overall weak economic sentiment, weighed down mainly by political uncertainty. The Japanese economy has so far maintained the momentum of the previous quarter, buoyed by recovering industrial production and strong business optimism.?
View on financial markets
Global financial markets continued to be affected by monetary policy stances in major advanced economies (AE), the spreading of contagion risks from specific emerging market economies (EME), and geopolitical developments. Among advanced economies, equity markets in the US touched a new high, driven by technology stocks, while in Japan, they were boosted by the weak yen. In contrast, stock markets in the Euro area suffered losses on signs of a slowdown and budget concerns in some member states. Sharp sell-offs have occurred on waning appetite of foreign portfolio investors for EME equities.?