RBI may keep rates unchanged in its policy review today
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RBI may keep rates unchanged in its policy review today

Last Updated: Tuesday, July 30, 2013, 11:06
 
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RBI may keep rates unchanged in its policy review today
Mumbai: Faced with an unstable rupee, elevated retail inflation and uncertain global economic conditions, the Reserve Bank Monday said it will follow a cautious monetary stance, with focus on stabilising the domestic currency and containing the current account deficit.

Hinting at a status-quo in Tuesday's policy review, the RBI, in its Macroeconomic and Monetary Developments First Quarter Review 2013-14, said, "The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth."

The strategy, it said, will succeed only if reinforced by structural reforms to reduce the CAD and step up savings and investment.

"Amplifying macro-financial risks warrant cautious monetary policy stance," the RBI said, adding it will endeavour to actively manage liquidity to reinforce monetary transmission that is consistent with the growth-inflation balance.

Presently, the short-term lending (repo) rate, or the rate at which RBI lends to banks, is at 7.25 percent, while the cash reserve ratio (CRR) is at 4 percent.

A majority of RBI watchers expect the policy to be a "no show" event, but are looking forward to the guidance which Governor D Subbarao will give in the quarterly policy announcement, which would be the last before he demits office in early September.

A survey of external professional forecasters done by the RBI increased its median expectation on the value of the rupee to 59.5 to the dollar by March 2014 - about the same level at which the domestic currency currently trades. This compares with the earlier expectation of 54.
On the growth front, the RBI raised concerns, saying that the recovery is likely to be slower.

"Growth is expected to improve as the year progresses, but recovery is likely to be slow," the RBI said.

The nation's economic growth touched a decade low of 5 percent in the last fiscal on account of a decline in the manufacturing and agriculture sectors.

The depreciation of the rupee to a record low of 61.21 against the dollar forced the RBI to take unconventional steps to curtail liquidity and curb speculation in the past fortnight.

The measures include allowing banks to draw only 50 percent of their total deposits in overnight borrowings and maintaining a 99 percent average CRR everyday, apart from recalibrating the interest rate on the marginal standing facility at 300 basis points above the policy repo rate under the LAF.

It said the recent liquidity tightening measures provide "some breathing time" and would succeed only if reinforced by structural reforms to reduce the CAD.

Flagging consumer price inflation, which has hovered in double digits for the past 15 months even as the wholesale price index has eased, the RBI said high retail inflation puts pressure on public finances and erodes domestic savings, which in turn widen the CAD.

The CAD will improve only on structural reforms, it said, adding that the CAD is expected to narrow in FY14 from the 4.8 percent level last fiscal. The 3.8 percent level achieved in the last quarter of FY13 is likely to be breached in the June quarter, it said.

"While monetary policy is largely guided by growth-inflation dynamics, it is also tempered by considerations of risks of external imbalances," the RBI said.

However, the RBI said that even though the number may come in lower, the slowdown in investor interest, which resulted in outflows of USD 12 billion since the last week of May alone, will mean financing the CAD will be a difficult task.

PTI


First Published: Monday, July 29, 2013, 18:27


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