Maintaining its conservative stand on the entire economic outlook, the RBI on the eve of its first quarter review of the current fiscal, stated that amplifying macro-financial risks call for cautious monetary policy stance, giving indications that changes in key policy rates could be unlikely.
“The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth. (However) this strategy will succeed only if reinforced by structural reforms to reduce the current account deficit (CAD) and step up savings and investment,” RBI said in its macroeconomic and monetary developments review released on Monday. It added that though headline inflation based on wholesale price index (WPI) has moderated to below 5 per cent, the consumer price inflation reached double digits. Add to this the recent rupee depreciation, and all these factors have led to upside risks.
Meanwhile Finance Minister P Chidambaram said in a function at Ahmedabad earlier in the day that RBI should also look at boosting sagging growth and generating employment while focusing on price stability. He however expressed concern over resurging gold imports in July and said that the restrictions imposed by the Government and RBI to contain inward shipments would continue. Seeking to assuage the worried industry, Chidambaram said that he did not expect the commercial banks to hike interest rates and assured adequate credit would be made available to them for making investments in large projects.
A survey of external professional forecasters done by Reserve Bank increased its median expectation on rupee value to the 59.5 level to the dollar by March 2014 - nearly the same level at which the domestic currency is now trading. This is compared to the earlier expectation of 54. “While monetary policy is largely guided by the growth-inflation dynamics, it is also tempered by considerations of risks of external imbalances,” the report said. Depreciation in the rupee to a record low of 61.21 against a dollar has forced the RBI to take some unconventional measures to curtail liquidity and curb speculation in the past fortnight.
The steps taken include limiting banks to draw only 50 per cent of their total deposits in overnight borrowings and maintaining 99 per cent average CRR everyday, apart from increasing of 2 per cent interest rate on the marginal standing facility. It said the measures give anything but “some breathing time” and would succeed only if reinforced by structural reforms to reduce the CAD. The CAD will improve only on structural reforms, it said, adding that CAD is expected to come lower in FY14 than the 4.8 per cent last fiscal. However, the 3.8 per cent achieved in the last quarter of FY13 is likely to be breached in the June quarter, it said. On the growth front, RBI raised concern saying that the recovery is likely to be slower.