Restoring stability in the currency market and inflation would be the key priority of Reserve Bank of India's first quarter (April-June) monetary policy and not growth as much, experts commented.
Most experts agreed that RBI's macroeconomic report issued on the evening before monetary policy is hinting that the central bank would continue its stance on controlling fund flows or the market liquidity till rupee stabilises.
“I think key takeaway is quite clearly that RBI is unlikely to rollback these measures in a double hurry. We would look at maybe a couple of months or up to a quarter,” Shubhada Rao Chief Economist at Yes Bank said.
Samiran Chakrabarty Head - Research (India) Standard Chartered Bank, however was more enthused about the fact that RBI agreed that liquidity tightening measures at best going to provide some breathing room. “These measures cannot deal with the underlying problems of current account deficit (CAD) or funding of it. So, in that sense Reserve Bank of India (RBI) is quite right in pointing out that these measures will be in place just as a protective shield so that the government does not have to take those corrective steps in uncertain market conditions,” he added.
Expert believed that RBI was unlikely to give any specific time line for rolling back liquidity squeeze measures. “I think that RBI is likely to play its cards close to its chest not really indicating in a clear way how long these measures are going to stay because if they clearly indicate that timeline then the effectiveness of these policies will be dampened,” Chakrabarty said.
No action tomorrow
All experts were of the same opinion that Tuesday’s monetary policy will be a non-event and RBI will maintain status-quo as it had introduced significant liquidity control measures in past two weeks.
“Monetary policy will be on the sidelines till the government gets its act together, this could mean six months to twelve months or long time,” A Prasanna Chief Economist, ICICI Securities said.
Also read: Is RBI June quarter policy a non-event?
Many believe any cut in key rates like repo and reverse repo was unlikely in near future. However, Indranil Pan, Chief Economist at Kotak Mahindra Bank said, “We are challenged in terms of CPI inflation, overall inflation dynamics, not only from the domestic perspective but also from the currency dynamic at this point of time, which clearly means that I would place 15-20% probability for rate hike cycle coming in before the end of March 2014.”
Onus of growth
In the monetary policy document RBI has clearly laid the onus of growth revival on government. The central bank pointed that although downturn in growth could get contained by good monsoon this year, slowdown is pervasive across sectors, output gap has remained for last several quarters. Any revival will not materialize until stable policy and regulation supportive of industrial activity are in place.
Experts were of the opinion that despite worsening industrial environment RBI many not review its growth and inflation outlook anytime before mid-year policy. “They will wait till mid year policy to downgrade growth or inflation outlook at it is too soon to take clear call on growth, Pan said.