Raghuram Rajan’s RBI surprises by keeping repo rate unchanged at 7.75 pc

Benchmark 10-year bond yield dropped 12 basis points to 8.78 percent from levels before the decision,while the NSE share index gained more than 1 percent. The Indian rupee strengthened.

However,the central bank warned it would remain vigilant on inflation and that it would be ready to act even in between policy reviews should headline or core inflation not ease as expected,albeit noting it would do so in a “calibrated” manner.

The RBI added it would also gauge the impact from any decision by the U.S. Federal Reserve to start withdrawing its monetary stimulus. The U.S. central bank concludes its policy meeting later in the day.

“The policy decision is a close one. Current inflation is too high,” said the RBI in its policy statement.

“However,given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels,and given the weak state of the economy,the inadvisability of overly reactive policy action,as well as the long lags with which monetary policy works,there is merit in waiting for more data to reduce uncertainty.”

The most recent data showed consumer prices posted their biggest annual rise on record in November – 11.24 percent – while wholesale inflation hit a 14-month high last month.

Surging inflation are being driven by higher vegetable prices that hurt the country’s poor the most,and are thus posing another headache to the embattled Congress party,which is facing general elections due by May,and was drubbed in recent state polls.

Still,analysts have said the surge in prices of vegetables such as onions are largely impacted by India’s lack of reliable ways to transport the produce and by traders suspected of hoarding supplies to raise prices,limiting the impact of monetary policy.

For businesses and investors in Asia’s third-largest economy,the priority had been a recovery in growth,which would help India again attract investment and inflows that would help contain a current-account deficit that surged to a record high in the last fiscal year.

Wholesalers have also been saying vegetable prices have eased this month,providing some potential relief on inflation,though analysts warned prices could again spike.

“I think it is just postponement of action,because the policy clearly says they (the RBI) may take action any time,even in the interim between two policies,if the situation warrants,” said Rupa Rege Nitsure,chief economist of Bank of Baroda in Mumbai.

The RBI said on Wednesday it would retain its vigilance on inflation.

“There are obvious risks to waiting for more data,including the possibility that tapering of quantitative easing by the U.S. Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation. The Reserve Bank will be vigilant,” it said.

COMMENTARY

Vivek Gupta- Director Research,CapitalVia Global Research Limited

The move of RBI of not to hike repo rate is a welcome move and not a harsh move. Yes inflation is on the high but as the RBI Governor mentioned that they still need to check more data on Inflation and they are also expecting a decrease in food inflation by this month,so if we talk about the overall economy,keeping the rate unchanged and not hiking is a better move. The most prominent reason for inflation is the fall in the value of rupee. And the only long term solution for the same is overall improvement of the economy with more investors coming in and the decrease in fiscal deficit. And anyhow,the short term change in interest rates is not going to have a huge impact on the inflation immediately.

Dr. Soumya Kanti Ghosh,Chief Economic Adviser,Economic Research Department,State Bank of India.

The RBI decision not to hike rates was a pleasant surprise to the market. This policy decision by the RBI clearly emphasizes (a) RBI concern to address growth,(b) Premise of food inflation rapidly cooling off from December and (c) Surprising the market by going against the market consensus! The latest policy action by the RBI mirrors the fact that in an uncertain world,the optimal value of monetary policy instrument depends crucially on use of more information than what the policy makers may actually conceive (and hence the reference to Dec13 onwards inflation data by Governor). Interestingly,under such a scenario,it may actually pay for the policy maker to go the wrong way! Going by the several policy actions,in the last couple of months,policy surprises has been the order of the day! For example,in Sep13,the RBI took the market by complete surprise by hiking the repo rate! In Oct13,the RBI brought a significant chunk of oil demand back into the market,almost unnoticed. In Nov13,the RBI again took the market by surprise by announcing a new 10 year paper for auction,and now status-quo. Going forward,thus dont be surprised,if the RBI goes for the wrong / opposite way on rate increases!

RAJEEV TALWAR,EXECUTIVE DIRECTOR,DLF LTD,DELHI

“I think this (the RBI decision to hold rates steady) is the first sign of recovery. Thank goodness the RBI governor has not panicked. Let us see till February. Hopefully,if food stocks are released in the market,food inflation comes down and that will be the end of the cycle.”

NAVNEET MUNOT,CHIEF INVESTMENT OFFICER,SBI FUNDS MANAGEMENT,MUMBAI

“A bit surprising given that they (the RBI) have been maintaining a hawkish stance and with the persistence of high inflation,markets were expecting a rate hike today,so no change in the repo rate comes as a surprise.”

“Given the headline inflation,we still expect another rate hike. They have indicated they will act in between if needed. Maybe they will watch the inflation situation and the(industrial) output data closely. They could also be waiting for the meeting of the U.S. Federal Reserve (later today).”

SUJAN HAJRA,CHIEF ECONOMIST,ANAND RATHI SECURITIES,MUMBAI “The pause was surprising given the sharp rise in both retail and wholesale inflation. Clearly,the RBI expects a sharp fall in inflation during December-February. It is also probably getting unnerved by weak growth and will also wait for the Fed action later tonight. However,we do not see inflation fall significantly going ahead.”

PHANI SEKHAR,FUND MANAGER,ANGEL BROKING,MUMBAI

“It is a calibrated policy based on the assumption that inflation in November was a one off. It also has a caveat that the RBI can act outside the policy too. A lot now depends on the next data reading or other evidence on inflation.

“Equities would react positively for the next few days. Markets are forward looking and would even try to extrapolate this into an end of rate hike cycle for the short term.”

RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI:

“It is completely unexpected given the liquidity in the system as well as the inflation trajectory. I think it is just postponement of action,because the policy clearly says they (the RBI) may take action any time,even in the interim between two policies,if the situation warrants.

“They are saying this because they are waiting for food inflation to ease,because these spikes,according to them,were caused by temporary imbalances.

“We should be prepared for acute tightness going forward,given the kind of abnormal inflationary pressures the country is facing and I expect these pressures to continue. I feel there will not be any alternative but to reassert monetary tightening,which the next data point would guide.”

DARIUSZ KOWALCZYK,SENIOR ECONOMIST EX-JAPAN ASIA,CREDIT AGRICOLE CIB,HONG KONG

“The RBI governor Rajan is losing credibility after his tough language expressing strong disappointment with high inflation last week. We expect INR to fall,but equities and bonds to rise.”

MARKET REACTION

The benchmark 10-year bond yield fell as much as 15 basis points on the day to 8.76 percent after the policy review.

The partially convertible rupee was trading at 61.81/82 per dollar versus its previous close of 62.01/02.

The benchmark BSE share index was up 1.1 percent,while the Nifty rose 1.2 percent.

BACKGROUND

* Wholesale price index (WPI) climbed 7.52 percent in November from a year earlier,its quickest pace since September 2012,compared with 7 percent in October,data showed on Monday.

* Data showed last week October’s industrial production output shrank 1.8 percent year-on-year,dampening sentiments after recent gross domestic product data had suggested the economy may have bottomed out.

* India’s economy grew a higher-than-expected 4.8 percent in the three months through September,helped by an uptick in agriculture and construction,government data showed last month.

Rajan surprises everyone yet again; leaves rates unchanged

(PTI) RBI Governor Raghuram Rajan surprised the markets today by leaving all key policy rates unchanged,notwithstanding persistent high inflationary pressure.

The short-term lending rate was kept unchanged at 7.75 per cent,while the cash reserve ratio (CRR) remained at 4 per cent,the Reserve Bank of India said in its Mid-Quarter Monetary Policy Review.

The decision to keep rates unchanged will be a big breather for the industry and retail borrowers in particular as the markets had expected another 25 bps hike in the short-term lending rate.

The Reserve Bank said it will take “calibrated action” in the future,based on inflationary trends and action by the US Federal Reserve.

The status quo decision came as a surprise as only last week the RBI had pulled up banks for not helping it in monetary policy transmission.

Our reading is significant fall in vegetable prices at both wholesale and retail level, said Raghuram Rajan,adding,Current inflation is too high but RBI will wait for more data.

If expected softening of food inflation does not materalise,RBI will act,including on off-policy dates. Rajan added.

Since taking over as the RBI chief in September,Rajan had increased the key rate by 0.50 per cent in two instalments.

Shifting his stance to promote growth from inflation management,Rajan said continuing weakness in growth was the main driver of his policy action.

The stock markets reacted positively and the S&P BSE Sensex shot up 140 points to 20,852 immediately after the policy was announced.

State Bank of India Chairperson Arundhati Bhattacharya said the bank would not contemplate cutting deposit rates as “it really hurts the depositors and we would not like to do that. Our rates are still higher than what it was on July 15,I see no immediate response toward rate cut.

“In view of the fact that liquidity is ample in the system,we will definitely be looking at the rates and we will try to see if something needs to be done… may be for the bulk (depositors) we might look at doing something.”

Commenting on the policy,Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan said: “It is a difficult balancing act… I certainly think that the priority to RBI is price stability and therefore they should keep continuous watch on what is happening to inflation.”

While retail inflation soared to a nine-month high of 11.24 per cent in November,the index based on wholesale prices zoomed to a 14-month high of 7.52 per cent last month.

Analysts are of the opinion that inflation has peaked and will ease from December as food prices cool on better supplies with winter crops coming in.

Rajan,however,sounded cautious when he said,”The policy decision is a close one. Current inflation is too high. However,given the wide bands of uncertainty surrounding the short-term path of inflation from its high current levels,and given the weak state of the economy… there is merit in waiting for more data to reduce uncertainty.”

GDP growth in the second quarter of this financial year came in at 4.8 per cent after a reading of 4.4 per cent in the first quarter,resulting in a 4.6 per cent expansion in the first half.

However,October factory output shrank 1.8 per cent,the first contraction in four months.

There was a massive improvement in the current account deficit (CAD),which narrowed to 1.2 per cent of GDP in the second quarter after a steep decline in gold imports. The CAD was 4.9 per cent of GDP in the first quarter (April-June).

The central bank RBI said there are risks to waiting for more data on inflation,including the possibility that the tapering of the US bond-buying programme may disrupt the external markets and the perception that the RBI is soft on inflation.

“Even though the Reserve Bank maintains status quo today,it can help guide market expectations through a clearer description of its policy reaction function.

“…If the excepted softening of food inflation does not materialise and translate into significant reduction in headline inflation in the next round of data releases,or if inflation excluding food and fuel does not fall,the RBI will act,including on off-policy dates if warranted,so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold,” the Governor said.