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India keeps policy rate unchanged in surprise move

07 October 2018

The rupee, which is now Asia's worst-performing tender and has lost around 14 percent of its value against the USA dollar this year, has been under pressure from rising oil prices and higher United States interest rates. At the Interbank Foreign Exchange (Forex) market, the local currency opened higher at 73.56 a dollar against its previous record low closing of 73.58.

It recovered to a high of 73.42, but failed to sustain the momentum and plunged to 74.23 after RBI's policy announcement.

At 09:15 AM, the rupee was trading at 73.64 a dollar, down 30 paise, from its Wednesday's close of 73.34. Subsequently, the RBI raised the repo rate or short term lending rate by another 25 basis points in August policy meet.

The monetary policy committee probably decided against the rate hike for two reasons.

The rupee has slumped in recent months amid a global rise in oil prices and a sell-off in emerging markets. "Also, the rupee has depreciated to its all-time low to 74 against the dollar should attract NRI property buyers".

The 10-year benchmark bond yield fell to 8.03% from 8.13% before the policy was announced, as traders expected a rate hike were wrongfooted.

"The Reserve Bank of India's MPC was expected to hike rates in its latest monetary review, given the impact of petroleum prices as also rupee value in the global currency market".

The rise in minimum support price for agri-commodities in domestic market added with rising crude in the global scenario has already triggered inflation concerns in the country.

In absolute terms, the rupee is down around 17 per cent since January this year.

Still, the expectation was the RBI would give some weight to the argument of supporting the currency to curb future inflationary pressures, according to Prakash Sakpal, an economist at ING Bank NV in Singapore.

Investment-wise, provisional data with exchanges showed that foreign institutional investors sold stocks worth Rs 1,550.04 crore on Wednesday.

'Markets are in a panic right now, they are probably pricing in more rate hikes than what the MPC can deliver, ' a senior debt trader at a private bank said. The RBI doesn't have any target or band in mind and acts only to manage volatility.

BAML says there's a considerable chance the RBI will raise rates again tomorrow. Shares of Reliance Industries dipped 5.4% to 1,140 rupees per share on the BSE in intra-day trade, recording their sharpest intra-day fall during calendar year 2018.

India keeps policy rate unchanged in surprise move