RBI may hike repo rate by 25 bps on Friday

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The reverse repo rate was retained at 6.25 percent.

The domestic currency was quoting 65 paise lower at 74.23 (intra-day) against the dollar soon after the RBI announced its monetary policy.

Prakash Sakpal, economist, Asia at ING said that even a hike of 25 basis points is unlikely to help save the rupee, adding that the central bank will need to do more but that looks unlikely on the grounds of on-target inflation and stress in the financial sector.

As per the RBI panel, the hike in minimum support price (MSP) for Kharif crops, rising crude oil prices and uncertain global financial environment may hamper inflation.

Mumbai: On a day the rupee breached the 74- mark against the U.S. dollar for the first time, RBI Governor Urjit Patel said on Friday that the domestic currency is still better than its emerging market peers.

It lowered the inflation outlook to a range of 3.9 per cent to 4.5 per cent for the second half of the fiscal year ending March from 4.8 per cent seen previously. Regardless of the rising interest in the United States, and other macro economical issues in India, RBI has not hiked the interest rates.

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The Indian central bank's intervention on Wednesday to calm down money markets proved short-lived in containing the fall of the rupee and its fallout on the stock and bond markets.

The rupee has slumped in recent months amid a global rise in oil prices and a sell-off in emerging markets.

The rupee depreciation is due to overall strengthening of the U.S. dollar against local currencies, widening of trade and current account deficits due to higher crude prices, portfolio outflows and risk aversion among portfolio investors, it said. "Despite Government's plan to cut borrowing in H2FY19, yields continued to increase due to rate hike expectation from RBI".

The markets were expecting the RBI's six-member Monetary Policy Committee (MPC) to raise the interest rate but the MPC changed its monetary policy stance to "calibrated tightening" of the interest rate cycle from "neutral", indicating that rates could go up in the future.

A plunging currency may prompt the Reserve Bank of India to hike interest rates for the third time since June when it meets on Friday.

During his media address, RBI governor Urjit Patel stressed that the plummeting value of rupee is moderate in comparison to currencies of other EMEs (emerging markets economies).

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