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Prakash Sakpal, Asian Economist at ING, holds the view that by keeping the policy on hold, the central bank of India seems to have dumped the rupee and pushed the ball in the government’s court for more substantial currency stabilisation measures.

Key quotes:

   “¢   RBI surprises by keeping rates unchanged

“The Reserve Bank of India’s monetary policy committee voted 5-1 to keep the repurchase and reverse repurchase rates unchanged at 6.50% and 6.25% respectively at today’s meeting.”

“The decision was surprising for us and many others as only nine out of 49 participants in the Bloomberg poll had predicted no change, which seemed to be impacted by domestic liquidity concerns rather than currency weakness, even as a depreciating rupee remains a constant threat to the RBI’s inflation target. We thought the RBI would give some thought to supporting the rupee in a pre-emptive move to curb future inflationary pressures, however, in the end, we and many others were wrong.”

   “¢   The ball is now firmly in the government’s court

“Not only the central bank, but the government also appears to have taken a backseat on the currency. And today’s decision shifts the onus to the government for substantial currency stabilisation measures.”

“While the measures announced by the government so far have proved to be insufficient, the authorities seem to be dragging their feet on the other required actions. Such a policy backdrop leaves the rupee on the path to a free fall, the first test of which came as the USD/INR spiked above the 74 level in a knee-jerk reaction to the RBI announcement, although it retraced to 73.8 as of this writing.”