Published: Sun, October 07, 2018
Markets | By Noel Gibbs

Business RBI keeps repo rate, reverse repo rate unchanged

Business RBI keeps repo rate, reverse repo rate unchanged

Concerns about rising inflation, intensifying trade war and capital outflows have had an adverse impact on the Indian currency, analysts said.

The rupee has continued its downward spiral on back of a consistent rise in crude oil price, which has already breached $85-mark for the first time in four years ahead of the U.S. sanctions on Iran.

The rupee Wednesday weakened further to 73.25 against the U.S. dollar while brent crude was trading near USD 85 per barrel.

A higher interest rate in the USA will likely prompt the RBI to tighten the policy rate despite a relatively tame inflation, as the central bank seeks to cushion the rupee's fall, the analysts said.

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Most analysts expect the central bank to hike rates by 25 basis points (bps) when it announces monetary policy today. The rupee has been in freefall in the year so far owing to capital outflows as foreign investors rerouted funds from emerging markets like India to safe havens like the U.S., where the Federal Reserve is tightening rates. The currency pared some losses to touch a high of 72.90 per dollar on market speculation that RBI may open special dollar window for oil companies.

"The rupee fall, in some respect, is moderate in comparison to several other emerging market peers", the governor said.

A weaker currency and higher oil prices are putting upward pressure on inflation, although domestic financial conditions are already tight.

Ever since the repo rate was hiked by 50 basis points (0.50%) in the last few policy announcements, the lending rates too have gradually gone up.

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The rupee has tanked 14 percent against the dollar this year as investors withdraw from emerging markets.

Investment-wise, provisional data with exchanges showed that foreign institutional investors sold stocks worth Rs 1,550.04 crore on Wednesday.

"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 dollar-rupee", Ashish Vaidya, executive director and head of trading at DBS Bank in Mumbai.

BAML says there's a considerable chance the RBI will raise rates again tomorrow.

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Repo rate is the rate at which the RBI lends money to banks and is an important tool for RBI to control inflation. "Given the rising oil and trade tensions, traders will bet on exports going up, to curb further weakening in the currency", said Anand James, Chief Market Strategist at Geojit Financial Services.

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