Patel defends status quo, shift in policy stance

The surprise move left the market and the rupee bleeding, as the RBI watchers were expecting a rate hike to stem slide in the rupee, which plummeted to a new low of 74.23 to the US dollar in intra-day trade.

Given the shift in policy stance from "neutral", a rate cut is off the table and one should expect only a status quo or a hike going forward, the monetary authority said, dismissing the interpretation of Friday's status quo as a deferred rate hike.

Patel said the stance has been changed to "calibrated tightening" from "neutral" because the RBI feels that the risks are "tilted to the upside".

Defending the status quo, Patel said, "Please recall that we had two rate hikes in the space of two months...we are not bound to increase rates at every meeting because that is not required given our inflation outlook and forecast at this point of time."

Patel was answering a specific question from the media on the call to hold rates in the face of increased expectations of a rate hike due to the massive fall in the rupee against and its likely impact on inflation.

Patel said both the RBI and MPC considered all the factors influencing the price rise situation before arriving at its inflation forecast using its modelling tools.

"As far as interest rates are concerned, the policy stance is exclusively focused on the mandate of flexible inflation targeting," deputy governor Viral Acharya chipped in defending the no-change policy.

Patel said the stance has been changed to "calibrated tightening" from "neutral" earlier because the RBI feels that the risks are "tilted to the upside", but affirmed the commitment to ensure that inflation is at the 4 per cent band in the medium term as part of the flexible framework it has signed up with government.

It can be noted that despite the surprising status quo, both the currency as well as equity markets reacted negatively to the policy, leading many to wonder if this is a deferred hike given that the stance has been changed.

While the Sensex tanked 792 points to close below the 35,000-mark, or 2.25 per cent down, at 34,376.99, the broader Nifty plunged 282.80 points, or 2.67 per cent, to close at 10,316.45 points. This is the lowest closing since April 23.

The rupee was in a free fall after the policy announcement, plunging below 74.13 a dollar for the first time.

"The stance is not necessarily a deferred action. That could be said even with a neutral stance. What this stance indicates very clearly is that going forward there are only two options in this rate cycle -- either we increase the rates or we keep them steady. With a neutral stance, a cut was also on the table," the governor said.

"The monetary policy is exclusively focused on inflation targeting and that is our legislated mandate," the governor added.

Patel also said compared to its projections in August, there has been a 20 bps dip in inflation forecasts for the first quarter of the next fiscal.

Meanwhile, Patel also underscored the importance of not breaching the fiscal deficit targets by government and hoped government has internalised the same while taking measures like Thursday's excise duty cut on fuels.

He pointed out that government affirmation on meeting the 3.2 per cent fiscal gap was made just days prior to the announcement on excise duty cuts.

"So far, we have to take it (government commitment on fiscal deficit) at face value," he said.