In an unexpected move, the Monetary Policy Committee of Reserve Bank of India (RBI) on Friday kept the repo rate unchanged at 6.5 per cent. The MPC changed the stance from 'neutral' to 'calibrated tightening'. Soon after the announcement, the Indian rupee tumbled to its all-time low of 74.10 against the US dollar.
In its Fourth Bi-monthly Monetary Policy Statement for 2018-19, the central bank said the decision of the MPC is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent.
The MPC meet comes amid rapid rise in international crude oil prices and Indian rupee hitting its all time low by breaching 73 mark against the US dollar. India's current account deficit (CAD) has also widened.
The RBI's MPC had raised key policy rates in the previous two meetings. RBI had hiked key policy rate in this fiscal's second bi-monthly policy in June after a hiatus of four-and-a-half years. Subsequently, the RBI raised the repo rate or short term lending rate by another 25 basis points in August policy meet.
Reserve Bank also retained GDP growth estimate at 7.4 per cent for the current financial year, adding that it is likely to go up to 7.6 per cent in FY20.
The RBI Governor Urjit Patel 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.
The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 per cent on a durable basis, he added.
On inflation, RBI said that the outlook is expected to be influenced by several factors. "First, food inflation has remained unusually benign, which imparts a downward bias to its trajectory in the second half of the year," RBI said.
Inflation is projected at 4.0 per cent in Q2 of 2018-19, 3.9-4.5 per cent in H2 and 4.8 per cent in Q1 of 2019-20, with risks somewhat to the upside, it added.