RBI's monetary policy review of 30 july 2013

The Reserve Bank of India today maintained a status quo by not revising the repo rate or the cash reserve ratio but turned unexpectedly dovish which made the slide below the psychological level of 60/dollar, for the first time since July 9.

The liquidity tightening steps of the central bank which were unleashed a fortnight back were able to halt the sharp depreciation of the currency.

The central bank kept the March end inflation forecast unchanged at 5%, while cut GDP growth forecast for 2013-14 to 5.5% from 5.7% projected in May.

In the post policy press meet RBI governor Subbarao acknowledged that while there was a strong case for further policy easing as growth has moderated more than expected but an uncertain external sector prevented in taking such a step. After cutting the key policy rate by 75 bps cumulatively on three consecutive occasions, RBI held the rate in the June policy.

“As far as the broader monetary policy stance is concerned, there would have been reasonable arguments for further monetary easing because growth has moderated more than we expected and inflation is not as uncomfortable as before as much as there are risk factors... So there would have been a case for monetary policy easing but for the external sectors concerns (it was not done),” Subbarao said. This could well be the last policy of the governor whose five year term ends on September 5, if not extended by the government.

While the governor assured that once there is some stability to the exchange rate, policy rate could be eased but warned about a host of risk factors external situation which could impact capital flows, and pass though of oil prices along with steady global crude prices which can exert pressure on inflation.

The rupee which was weak since morning but fell sharply during the closing hours, which ended 60.49 per dollar as compared with previous close of 59.42. During the last hour of trading it touched a low of 60.58.

The rupee’s weakness in the late hours of trade is due to central bank’s reservation to the proposed sovereign bonds issuances on the ground that cost of such an issuance is more than the benefit.

“In RBI views, the cost of sovereign bond issue, in the current juncture, outweigh the benefits. We should be doing sovereign bond issue, if at all, from a position of strength, at a time when we are a lot less vulnerable,” Subbarao said.

The fall in rupee also impacted both the equity and bond markets. Bond yields which fell below the 8% mark following policy announcement rose as the rupee weakened. The yield on the 10-year government bond 7.16% 2023 ended at 8.25% on Tuesday compared with previous close of 8.13%.

Similarly, equity market also closed weaker as there was no clarity from RBI on when the liquidity tightening measures will be withdrawn which will pave the way for monetary easing.  

“The rollback of the measures will be data dependent, and is linked to decline in volatility and disorderly movements in the exchange rate. We will also make an assessment of the global markets and see how vulnerable they remain to further announcement or some action,” Subbarao said.

Corporate India drew comfort the central bank’s stance. “We draw heart from the statement of the RBI saying that had it not been for the volatility, the rates could have been reduced, since inflation has started to moderate. We see this as a softening of stance by the RBI" said Kris Gopalakrishnan, President, CII.