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RBI keeps policy rates on hold; says rupee a priority

Mumbai, July 30, 2013, DHNS;

Status Quo: '4.8% CAD a formidable structural risk'

The Reserve Bank of India (RBI) on Tuesday opted to keep all key policy rates unchanged and asked the government to take urgent steps to bring down the high current account deficit (CAD).

The RBI said that it will endeavour to keep inflation, which is under threat from a depreciating rupee, at 5 per cent by March end.  "With upside risks to inflation still significant in the near term, it saw little space for further policy easing and warned that risks on account of the CAD could warrant a swift reversal of the policy stance,” the RBI policy document said in its first quarter review of monetary policy.

Accordingly, the repo rate stays at 7.25 per cent, while the reverse repo or the rate remains unchanged at 6.25 per cent. The cash reserve ratio will be maintained at 4 per cent. The Marginal Standing Facility too remains at 10.25 per cent.


The central bank also revised its GDP growth projection for fiscal 2014 to 5.5 per cent, down from the earlier forecast of 5.7 per cent, saying continued domestic as well as global uncertainties would hit the Indian economy. 

Further, RBI hinted that any rate cut in future would be subject to market stability.
The recent liquidity tightening measures taken to support the rupee will be rolled back in a calibrated manner, it said .

With this, RBI governor Duvvuri Subbarao, who took over the stint of governor in September 2008, presented his last quarterly policy.

He is slated to retire days before the next mid-quarter review on September 18. The second quarter monetary policy is scheduled on October 29.

In his post-policy media briefing here, Subbarao expressed reservation against sovereign bonds issue saying it would compromise financial stability and also the cost of a sovereign bond issue outweighs the benefits at current juncture. "Sovereign bond issue should happen at a time of strength," he added.

"The policy stance is guided by the need for continuous vigil and preparedness to proactively respond to risks to the economy from external developments, especially those stemming from global financial markets," Subbarao said.

Giving the policy guidance,  he said, “Monetary policy going forward will be shaped by the consideration of supporting growth, anchoring inflation expectations and maintaining external sector stability."

He said that CAD, which was 4.8 per cent last fiscal, is a "formidable structural risk" leading to increased stress on balance of payments and reflecting rising external indebtedness. Over the next 6-12 months, $174 billion of external debt has to be repaid, while depleting foreign-exchange reserves, which stood at $280 billion as of last week, have reduced the import cover buffer to about six months.

‘Food bill to hurt growth’

The UPA Government's proposed Food Security Bill carries a slew of "economic consequences", including pressures on fiscal deficit, growth and inflation, Reserve Bank Governor D Subbarao said on Tuesday.

"There are going to be lots of economic consequences of the Food Security Bill (FSB), which at the RBI, we will study further," Subbarao said .

However, he added that the central bank is still studying the Bill's proposals and is yet to quantify the implications of the ambitious programme.

Rupee breaches 60

The rupee breached the Rs 60 per dollar mark in afternoon trades on Tuesday consequent to the RBI unveiling its first quarter policy review.

This is the first time the rupee breached the 60 per dollar mark after the Reserve Bank of India (RBI) announced liquidity tightening measures on July 15.  In the afternoon trades at 1:55 pm, the rupee was quoting at 60.07 compared with previous close of 59.41 per dollar.

Sensex down 245 points

Key benchmark indices on Tuesday dropped for fifth day in a row as the rupee dropped below the 60-mark.

The market breadth, indicating the overall health of the market, was weak.  Weighed down by selling oil & gas, FMCG, telecom and rate sensitives, the BSE Sensex was down 244.94 points to close at 19348.34 while the NSE Nifty slipped 76.60 points to finish below 5,800 level at 5755.05 points.  

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