RBI December Policy: A dovish hold, while retaining its stance to calibrated tightening

If you had asked 100 financial experts regarding RBI’s October policy decision, majority would have surprised that RBI kept interest rate unchanged. Back then, falling rupee value, hardening domestic yields and falling equity markets were the norm. The Indian rupee was making new lows on a regular-basis, hence analysts had expected RBI to hike interest rates, in-line with its EM peers, to protect falling rupee. Contrary to expectations RBI kept interest rates unchanged while maintaining rupee value must be decided by market forces and MPC’s not willing use interest rate as a tool to control currency.

        

	5-Oct	4-Dec	Change
Crude Oil	84.16	62.19	-26.11%
Indian Rupee	73.80	70.35	-4.67%
Nifty	10,316.00	10,855.00	5.22%
India 10 year	8.16%	7.56%	60 Bps lower

   Table 1: Prices movement since last policy on 5^th October

With the benefit of hindsight now, MPC’s decision to hold rates looks great. Higher crude prices, which were main reason of weakening rupee, reversed sharply. As table below shows: Crude prices corrected more than 25% in last two months, providing much needed relief to India’s macro-indicators. During same period, India’s 10 year bond yields eased 60 bps, Nifty gained over 5% and rupee recovered to 70.35, before making a high of 69.69 levels.

Easing Inflation: India’s CPI inflation continued to surprise on the downside, majorly because lower food prices. Headline CPI inflation eased further to 3.31% in October against the reading of 3.70% in September. Food inflation, which constitute nearly 45% of headline inflation, stood at just 0.86%. Overall, CPI inflation is likely to remain below RBI’s target of 4%, as crude oil prices have turned negative for the year.

In last policy, RBI had changed its stance to calibrating tightening with Mr. Dholakia, voting to keep the stance to neutral. Amid continued volatility around crude oil prices, RBI is unlikely to reverse its stance just yet. Hence, RBI likely to keep interest rate unchanged, while retaining its stance to calibrating tightening.