India: RBI keeps rates unchanged in October
At its monetary policy meeting on 3–5 October, five out of the six members of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) voted to keep interest rates unchanged. One committee member voted to raise rates by 0.25 percentage points. Because of the majority decision, the repo rate remained unchanged at 6.50%, the marginal standing facility (Bank Rate) at 6.75% and the reverse repurchase rate at 6.25%. October’s MPC decision came after interest rates were hiked in both June and August to keep a lid on accelerating inflation.
Inflation has slowed in recent months, falling from 4.9% in June to 3.7% in August, which is close to the 4% midpoint of the Reserve Bank of India’s 2–6% target range. At its monetary policy meeting in October, the RBI cut its inflation forecast for Q2 FY 2018—which runs from July to September—to 4.0% from 4.6%. It also cut its projection for the second half of FY 2018—which runs from October to March—to a range of 3.9% to 4.5%, down from the previous forecast of 4.8%.
Meanwhile, the Reserve Bank of India left its GDP growth forecast for FY 2018 unchanged in October at 7.4%, which would mark the largest economic expansion since FY 2015. However, despite the strong economy and slowing inflation, the Indian rupee has been one of the worst performing currencies in recent months and has now weakened by around 14% against the U.S. dollar since January. This is due to high oil prices and outflows from India’s stock and bond markets.
Regarding the latest monetary policy outturn, research analysts from Nomura commented:
“We think the MPC’s decision to stand pat clearly signals that the anchor of monetary policy remains inflation. Interest rates will not be used to manage the currency, but the MPC will respond to the inflationary consequences of depreciation, in our view. Currently, while higher oil prices and a weaker currency add to near-term cost pressures, the RBI has also acknowledged the expected inflation undershoot because of lower food price inflation and tighter financial conditions. The pause also gives it a chance to wait and see the impact of the hikes already delivered. This is a bold move in the current external environment, but it is the right move, in our view.”
In the October meeting, five out of the six MPC members voted to change the RBI’s monetary policy stance from “neutral” to “calibrated tightening”. The RBI governor said that the MPC’s previous “neutral” stance meant it was open to considering a rate cut. By changing to “calibrated tightening”, this indicates that the MPC has ruled out any rate cut for the time being and that the next move will either be standing pat or raising rates.
The next monetary policy meeting is scheduled for 3–5 December.