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'RBI stance to stem rupee slide as bond yields will induce FIIs'

Last Updated: Monday, June 17, 2013 - 17:48

Mumbai: Analysts from across the spectrum have described the Reserve Bank's decision to hold all the key rates "on expected lines" as the weak macro picture and rupee have tied its hands, but they do see room for rate cuts .

They also opined that the "hawkish" stance will help arrest the fund outflows, which in turn should help stem the rupee slide, as higher bond yields will induce foreign funds to remain invested in the domestic debt instruments.

It can be noted that the rupee lost nearly 7 percent since the beginning of May as FIIs have pulled out nearly USD 4 billion from the domestic debt, as bond yields fell on expectation of RBI cutting rates Monday.

This flight of capital has been the major reason for the rupee volatility.

Domestic rating agency Icra MD and Chief Executive Naresh Takkar said: "The hawkish comment by the Governor is likely to result in a hardening of the bond yields, which in turn may improve arbitrage opportunities and arrest the FII outflows witnessed recently."

Crisil in a note said the rupee slide has tied the hands of the central bank. "The recent rupee depreciation has once again exposed the vulnerability of the country's current account deficit to volatile capital flows. The rupee fell from 53.7 on May 2 to a life-time low of 58.9 on June 11th-- a loss of almost 10 percent of its value," it noted.

Abheek Barua, Chief Economist at HDFC Bank, said for a central bank managing an "economy buffeted by adverse external pressures and extreme uncertainty in the global policy environment, coupled with the recent depreciation of the rupee, and the absence of any uncertainty about its future course warranted holding action by the RBI."

"The RBI seems to be clear that it is somewhat pointless to provide firm guidance given that the local and global macroeconomic environment remains fluid," he added.

Robert Prior-Wandesforde of Credit Suisse said lower headline inflation is a necessary but not sufficient ground for policy rate cuts, and the action was expected.

On the outlook, he said it's not yet the bottom of the rate cycle as there is room for more rate cuts this year.


First Published: Monday, June 17, 2013 - 17:48
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