India keeps its key rate unchanged, the rupee collapses in the face of surprise inaction

MUMBAI (Reuters) – The Reserve Bank of India has kept interest rates unchanged at a political meeting on Friday, dropping the rupee to a record high and stunned analysts who expected to an increase in rates to combat inflationary pressures resulting from high oil prices.

The RBI's Monetary Policy Committee (MPC) left the repo rate INREPO = ECI at 6.50%, although 35 out of 64 analysts polled by Reuters last week predicted a rate hike. The MBM also maintained the repo rate INRREP = ECI at 6.25%.

The panel, however, changed its political position in favor of "calibrated tightening" of the "neutral". Five of the six panelists voted to keep the rate unchanged.

"The current approach to calibrated tightening basically means that in this rate cycle a rate cut is off the table and that we are not required to raise our rates at every meeting," said the RBI governor, Urjit Patel, at a press conference. "As new data comes to us, we will consider changing our policies accordingly."

While the RBI has kept rates unchanged, analysts expect the central bank to raise rates by at least 50 basis points as inflationary pressures become more pronounced.

"The announcement of the RBI's policy of keeping rates unchanged is a surprise," said Abhimanyu Sofat, head of research at brokerage firm IIFL Securities Ltd., adding that if crude prices continued to rise, Increase, RBI could be expected to anticipate a rate hike.

The 10-year benchmark IN071728G = CC yield fell 8.13% before the policy announcement, from 8.13% to 8.08%, as traders were expected to a rate hike.

The Indian rupee INR = D2 fell to a new all-time low at 74.23 against the US dollar, weakening around 73.65 before the RBI's policy statement.

It has fallen by more than 14% since January, making it the weakest currency in the major Asian emerging markets.

The decline has been accentuated in recent weeks by the rise in the price of crude oil (India imports two-thirds of its oil requirements) and the sale by investors of emerging markets, which has increased pressure on oil companies. external balances of the country. In April-June, India's balance of payments became deficit for the first time in six quarters.

Other Asian central banks in countries that are experiencing trade deficits and are exposed to portfolio outflows and rising oil prices have shown that it is more urgent to raise interest rates. .

Last week, Bangko Sentral ng Pilipinas (BSP) raised the rates of increase from 50 to 4.50%, adding to the three increases worth 100 basis points since May. Bank Indonesia added 25 basis points to its previous four hikes this year, bringing rates to 5.75% as expected, an additional 150 basis points since May.

In its policy statement Friday, the RBI said that obstacles, such as escalating trade tensions, volatility and rising oil prices, as well as tighter financial conditions on the scale worldwide, put considerable risks on growth and inflation prospects.

Therefore, the RBI said it was vital "to further strengthen national macroeconomic fundamentals".

With general elections scheduled for May next year, Prime Minister Narendra Modi's Hindu nationalist party will want to campaign for strong economic growth and the success of the fight against inflation.

Taking a more gradual approach to rate hikes is expected to facilitate continued economic growth, with the RBI expecting 7.4% growth for the fiscal year ending March and 7.6% growth for the year. Next year.

The RBI reiterated its goal of keeping consumer inflation at 4.00% in the medium term on a "sustainable basis" and projected a rate of 4.8% by June 2019, slightly higher than the forecast of 5.0% that he had announced in August.