Continuing the unprecedented downward spiral, the Indian rupee on Friday sunk to an all-time low of 74.20 against the United States dollar.
The rupee, which is the worst performing major currency is Asia, has dropped about 7 percent since August when the RBI last raised rates. "We expect one more interest rate hike of 25 basis points during FY19, which will be dependent on the inflation trajectory (which will, in turn, depend on movement of oil prices and depreciation in the Indian currency)". The RBI maintained a status quo and kept the repo rate unchanged at 6.50 percent.
Repo rate is the rate at which the RBI lends money to banks and is an important tool for RBI to control inflation.
In real effective term, the rupee fall has been at 5 per cent, the governor said.
The RBI's decision on focusing on liquidity is expected to have a sobering impact on interest rates, particularly short-term rates.
The RBI lowered inflation forecast to 3.9-4.5% for the second half of the current financial year from the 4.8% projected earlier and to 4.8% for Q1 of 2019-20 from 5%. Bond yields and prices move in opposite directions.
But the policy statement contained little on that, as the central bank has aggressively bought government bonds through open market operations to keep markets liquid, rather than resort to administrative measures to release more cash into the system.
In its bi-monthly monetary policy meeting held today, the RBI pegged the headline inflation at 4.5 per cent by March 2019 with upside risks, saying the outlook is expected to be influenced by several factors such as food inflation, rising crude oil price and volatile worldwide financial markets.
Defending the decision, the bank said it was acting "to further strengthen domestic macroeconomic fundamentals".
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).