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RBI surprises by leaving policy rate unchanged, rupee tumbles

Reuters, Mumbai
The Reserve Bank of India (RBI) held interest rates unchanged on Friday, condemning the rupee to a record low and surprising analysts who had expected a rate rise to counter inflationary pressures arising from the weak currency and high oil prices, on Friday, condemning the rupee to a record low and surprising analysts who had expected a rate rise to counter inflationary pressures arising from the weak currency and high oil prices.
The RBI's monetary policy committee (MPC) left the repo rate at 6.50 percent, though 35 out of 64 analysts surveyed by Reuters last week had forecast a rate hike. The MPC also held the reverse repo rate at 6.25 percent. The panel however, shifted its policy stance to 'calibrated tightening" from 'neutral'.
Five of the six members voted to leave the rate unchanged this time, after the panel raised them by 25 basis points at each of its two previous meetings since June.
"Today's stance of calibrated
tightening essentially means that in this rate cycle a rate cut is off the table, and that we are not bound to increase rates at every meeting," said RBI Governor Urjit Patel at a press conference. "As new data comes in we would look into changing our policies accordingly."
Surprised by the RBI's inaction this time, analysts still expect the central bank to raise rates by at least 50 basis points more going ahead, as inflationary pressures become more pronounced.
The RBI reiterated its target of keeping consumer inflation at 4.00
percent in the medium term on a "durable basis", and projected a rate of 4.8 percent by June 2019, slightly better than the 5.0 percent forecast it gave in August.
The 10-year benchmark bond yield fell to 8.05 percent from 8.13 percent before the policy was announced, as traders expecting a rate hike were caught wrong-footed.
The rupee slumped as much 0.9 percent to a new all-time low of 74.23 against the US dollar, weakening from around the 73.65 ahead of the RBI policy statement.
"The first thing that came to my mind when I saw the decision was that RBI seems to be more confident than the market on the dollarrupee," Ashish Vaidya, executive director and head of trading at DBS Bank in Mumbai.
"It seems like RBI chose financial stability over rupee because there is no strong inflation pressure imminently."
The rupee has fallen more than 14 percent since January, making it the worst performing major Asian emerging market currency.