RBI Policy: MPC keeps repo rate unchanged at 6.50%

In a surprise decision, the Reserve Bank of India (RBI) retained the key policy repo rate at 6.50 percent.

Repo rate is the rate at which banks borrow short-term funding requirement from the central bank.

The decision to pause on rates was taken by the six-member Monetary Policy Committee (MPC) after a three-day meet, chaired by RBI Governor Urjit Patel.

Of the six members, five members -- Pami Dua, Ravindra Dholakia, Michael Debabrata Patra, Viral Acharya and Urjit Patel voted in favour of a status quo while one member -- Chetan Ghate voted for an increase in the policy rate by 25 basis points.

The RBI, however, changed its policy stance from 'neutral' to 'calibrated tightening'. This means rates will either be maintained or raised and a rate cut is off the table in this cycle.

Again, five members -- Pami Dua, Chetan Ghate, Michael Debabrata Patra, Viral Acharya and Urjit Patel voted in favour of changing the stance while one member -- Ravindra Dholakia voted to retain the neutral stance.

The RBI lowered the inflation projection from the August policy to 4.0 percent in Q2 of 2018-19, 3.9-4.5 percent in H2 and 4.8 percent in Q1 of 2019-20, with risks somewhat to the upside. In the August policy, CPI inflation was projected at 4.6 percent in Q2 of 2018-19, 4.8 percent in H2 and 5.0 percent in Q1 of 2019-20, with risks evenly balanced.

FY19 gross domestic product (GDP) growth target was retained at 7.4 percent, and the central fiscal deficit for FY19 at 3.3 percent.

The rupee reacted sharply to the status quo breaching the level of 74 to the US dollar for the first time. A day earlier, on October 4, the rupee hit a record low of 73.81 against the US dollar.

Benchmark indices also got hammered with the Sensex immediately shedding nearly 600 points. After a brief recovery, the index went spiralling downward.

In the bond markets, the yield on the benchmark 10-year bond declined to 1.3 percent to 8.05 percent. It had hit 8.2 percent a day earlier — the highest in three weeks.

June policy was the first time in four-and-a-half years after June 2014 that the repo rate was raised by 25 bps to 6.25 percent. In August policy this was raised by another 25 basis points to 6.50 percent.

Retail inflation declined for the first time in 2018 to 3.69 percent in August compared to 4.17 percent in July.

The RBI policy document pointed out that the outlook is clouded with several uncertainties such as the exact impact of increased minimum support prices on food prices, the vulnerability of oil prices, excise duty cuts on petrol and diesel leading to a moderation of inflation, volatility in global financial markets, a sharp rise in input costs, combined with rising pricing power, among others.

The MPC noted 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.

The inflation outlook calls for a close vigil over the next few months, especially because the output gap has virtually closed and several upside risks persist, the policy document read.