Just when we thought the times of central bank surprises were things of the past, the Reserve Bank of India (RBI) brought them back.
The RBI kept interest rates unchanged - repo rate at 6.5%, reverse repo rate at 6.25% - at the conclusion of its October 5 board meeting, following a 25 bps increase at its previous meeting on August 1.
The RBI's decision defied consensus expectations for a follow-up rate hike wherein which, according to a Bloomberg poll ahead of the decision, only nine out of 49 respondents called for no change in interest rates.
These predictions were based on sharply rising inflation expectations.
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Cyclical Outlook: Growing, But Slowing
To be sure, the country's inflation rate remains below the mid-point of the RBI's 4% (+/-2%) target - down for the second consecutive month to 3.7% in August from 4.2% in July and 4.9% in June.
But that's old stats. The precipitous slide in the Indian rupee this year would exert upward pressure on India's inflation. The Indian rupee ended at an all-time low of R73.85 to the US dollar at the close of last week's trading - after hitting R74.22 in intra-day trade and is now 13.6% down versus the greenback this year to date.
The rupee's depreciation would aggravate the upward push in India's inflation caused by rising oil prices - the price of Brent oil has risen by 24% between January and September this year - because of the country's dependence on oil imports.
According to Bank of America Merrill Lynch currency strategist Rohit Garg: "In terms of oil impact, we believe 10% rise in oil causes headline inflation to move higher by about 0.6%."
However, the Indian central bank doesn't seem perturbed and even lowered its inflation projections:
"Inflation is projected at 4.0 per cent in Q2:2018-19, 3.9-4.5 per cent in H2 and 4.8 per cent in Q1:2019-20, with risks somewhat to the upside. Excluding the HRA impact, CPI inflation is projected at 3.7 per cent in Q2:2018-19, 3.8 - 4.5 per cent in H2 and 4.8 per cent in Q1:2019-20."
The RBI lowered its GDP growth projections slightly: to 7.4% from 7.5% in Q2:2018-2019; to 7.1%-7.3% from 7.3%-7.4% in H2; and, 7.4% from 7.5% in Q1:2019-2020.
This is likely given that the rupee's depreciation would make Indian exports cheaper in the world market and hence, make its exports more competitive. But as the RBI notes:
"Tailwinds from the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war".