The Repo Rate Hike: Inflation Gave the Cover, the Rupee Gave the Reason

Policy review: RBI hints at status quo, will focus on stabilising rupee

[Editor: The US, like India imports large quantity of oil products (or Crude Oil and its derivatives)

for domestic consumption and at present it is carrying out QE3, but the inflation has not inched up much since the start of  this easing process. This  is the beauty of the US administration. 
On the contrary, it seems the government of India has given the RBI, an authority to manage everything, starting from inflation to growth, though both the issues are more to do with structural problems in the economy, as too much tightening for too long has already harmed it. This is attested by the increase in the cases of NPA in Banks and restructured loans of companies. But the government seems to be hardly bothered.

What I feel at this stage is that: the RBI should for repeated rate cuts till the REPO Rate comes to around 6%. At the present rate, who can compete with foreign companies? Though the Finance Miniser has said that in the near term the rates will not go up, but if the India Inc is not willing to borrow at this rate, then how will the growth take place? Let the rupee fall and find a base--artificial pegging of currency will not work, unless India Inc gets back to its rhythm and the Indian Stock Market starts to function again. Now if this is done I feel the exports will pick up, investments will come in the equity market (though there could be some out-flow from the debt market), and imports will decrease. 
Moreover, the government of India should do something to lift the sentiments in the capital markets, which is badly in need of reforms. There are hardly any retail investor and the brokerage houses are on the verge of closing down. The equity market has turned into a sort of Casino, which is posing a challenge even for the experts to make money. Unless something is done, quickly, the Indian capital markets could collapse]

MUMBAI: Hinting at status quo on policy rates, the RBI today said its immediate focus is to stabilise rupee and made a case for calibrated action to contain the current account deficit, which is a major reason for the steep fall in currency.

"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 CAD and step up savings and investment," RBI said in its macroeconomic and monetary developments review released on the eve of the policy announcement.

"Amplifying macro-financial risks warrant cautious monetary policy stance," it added.

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.

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 gives in the quarterly policy announcement, which would be the last before he demits office early September.

The depreciation in the rupee, which has shed over 10 per cent this fiscal, will weigh heavy on RBI, they said, adding that this is a shift from the central bank's focus on bringing down inflation and propping up economic growth.

"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.

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

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

On the growth front, RBI raised concern saying that the recovery is likely to be slower.

Courtesy: The Economic Times