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RBI maintains repo rate status quo

07 October 2018

For the first time ever, the Indian currency crashed below the 74-mark against the US Dollar, even after the Reserve Bank of India (RBI) kept its key policy rates unchanged.

Repo rate is the rate at which the RBI lends money to banks and is an important tool for RBI to control inflation.

"Other takeaway is they are not complacent that is why the stance has changed from neutral to calibrated tightening".

The market did not react well to the RBI's decision.

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The Reserve Bank of India (RBI) will make its interest rate announcement tomorrow, and it faces a policy dilemma.

All of this has resulted in currency depreciations in emerging economies, which is an understatement as far as the rupee is concerned.

"It's quite an unexpected decision by the monetary policy committee to keep the repo rate unchanged at 6.5 percent". Mr. Surendra Hiranandani, Chairman and MD of House of Hiranandani, spoke to Qrius about how sharply the currency and equity market reacted as soon as another rate hike was anticipated to curb inflationary pressures.

"It seems like RBI chose financial stability over rupee because there is no strong inflation pressure imminently".

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However, if the continental market trends are taken into account, the Indian rupee is the worst performing currency in Asia after seeing a record-breaking 13.5% percent fall in its value in 2018 alone. The RBI had hiked Repo rates twice since April this year - 25 basis points in the June policy and another 25 bps in the August policy.

Taking a more gradual approach to raising rates should make it easier to sustain economic growth, with the RBI forecasting expansion of 7.4 percent for the financial year ending in March and 7.6 percent for the following year.

Last week, the RBI's eased banks' liquidity coverage ratio norms last week, and announced it would be buying 360 billion rupees of government bonds through open market bond purchases to soothe the liquidity worries haunting markets.

Whether the aggressive policy move (if we get one at all) will eventually keep the rupee from losing further ground remains a perennial question given the lingering risks of a wider trade deficit from high oil imports and elevated inflation expectations. There was speculation that the RBI would increase the Repo rate to boost foreign investment inflows. Retail and food inflation also fell in the third quarter, bringing respite to the unabated hike in fuel prices.

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So while inflation in India is rising it's being driven by external factors, rather than strength in the underlying economy.

RBI maintains repo rate status quo