RBI hints at status quo; says rupee stability a priority

The Reserve Bank of India (RBI) Monday indicated that it will maintain status quo on key rates in order to ensure stability in the currency markets.

In a document released ahead of the monetary policy review, the RBI, however, said it would “endeavour to actively manage liquidity to reinforce monetary transmission that is consistent with the growth-inflation balance and macro-financial stability”.

The RBI is scheduled to announce first quarter review of the monetary policy for 2013-14 Tuesday.

The central bank said the priority of the monetary policy would be to restore stability in the currency market so that macro-financial conditions remain supportive of growth.

“Recent currency depreciation and upward revisions in fuel prices have increased upside risks to both wholesale and consumer price inflation,” it said in the document,“Macroeconomic and Monetary Developments First Quarter Review 2013-14.”

The RBI said the recent liquidity tightening measures taken by it had provided “some breathing time” in the currency markets.

“This strategy will succeed if reinforced by structural reforms to reduce the current account deficit (CAD) and step up savings and investment,” it said.

Earlier in the day, Finance Minister P Chidambaram said reviving growth should be among the priorities of the central bank.

“The mandate of a central bank must not only be price stability. The mandate of central bank must be seen as part of larger mandate which includes price stability, growth and maximising employment,” Chidambaram said while addressing a function of daily Divya Bhaskar in Ahmedabad. 

Analysts also feel that the central bank is likely to maintain a status quo.

“It is widely anticipated that the central bank would maintain status quo on the policy front,” said Federation of Indian Chambers of Commerce and Industry (FICCI) president Naina Lal Kidwai.

Kidwai, however, said the RBI must take into consideration the slowdown in growth especially of industrial sector.

“We need to pay heed to the fact that industrial growth has taken a severe hit. The recently released IIP data indicated negative 1.6 percent growth for May 2013, which is very disappointing,” Kidwai told IANS.

“The investment cycle is saddled and a sense of apprehension remains among investors. And this is despite the recent slew of announcements by the government,” she said.
President of Associated Chambers of Commerce and Industry (Assocham) Rana Kapoor said even maintaining a status quo would be a big decision considering the current macro economic situation.

“Rate reduction in the monetary policy seems impossible. Status quo itself will be a big decision,” Kapoor, also managing director and chief executive officer of Yes Bank, said at a media briefing last week.

In its last policy review announced June 17, the RBI had left key rates unchanged.
Currently repo rate, the rate at which the RBI borrows money from the commercial bank, is 7.25 percent and the reverse repo rate is at 6.25 percent.

The cash reserve ratio (CRR), or the share of deposits banks must keep with the RBI, is 4 percent.