INSTANT VIEW 2-India keeps policy rate unchanged in surprise move

Rupee plunges to fresh record low of 73.77 against dollar

The rupee's plunge to a new record low of 73.77 against the dollar by falling 44 paise in early trade, too, weighed on investor mood.

Adding to the bullish mood, Federal Reserve chairman Jerome Powell said on Wednesday that the central bank may raise interest rates above an estimated "neutral" setting as the "remarkably positive" USA economy continues to grow. But in light of the prevailing uncertainties, the committee maintained a neutral stance till August. Market is reacting strongly to Brent crude movements and with current pace 75 can likely be seen if crude touches 88-90 levels.

Prakash Sakpal, Asian Economist at ING, holds the view that by keeping the policy on hold, the central bank of India seems to have dumped the rupee and pushed the ball in the government's court for more substantial currency stabilisation measures. Thirdly, global financial markets remained volatile with emerging market economies' (EME) currencies depreciating significantly. The MPC voted 5:1 in favour of the status quo with only one member Chetan Ghate voting for a 25 basis points hike.

Since the MPC's mandate is to target inflation, there is a possibility that we may be seeing another rate hike - the third in a row. Rising global crude oil prices, a widening current account deficit at home, and fears of worldwide trade wars have spooked the currency market, leading to several currencies underperforming versus the dollar. So, they (RBI) may take a pre-emptive action. The projections of inflation for 2018-19 and Q1:2019-20 have been revised downwards from the August resolution.

The key question for markets ahead of the central bank meeting this Friday is whether it will overlook the rupee's weakness?

During his media address, RBI governor Urjit Patel stressed that the plummeting value of rupee is moderate in comparison to currencies of other EMEs (emerging markets economies).

The lowering of inflation risks were exclusively based on food inflation momentum which according to RBI over weights increase in household expectations, higher input & selling prices, sharp increase in crude oil prices and currency depreciation by ~6%. "If crude prices continue to surge, then the RBI may have to come with front-loaded rate increases".

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. The RBI has also said that any fiscal slippage at the central or state level will have a bearing on the inflation outlook, besides heightening market volatility and crowding out private sector investment.

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