OMO to continue to be driven by liquidity judgement: Gokarn

Deputy Governor of the Reserve Bank of India (RBI) Subir Gokarn says the central bank’s actions are driven by circumstances and that when it feels the need to take action on interest rates it will be taken.

“It is not with the sole motivation of sentiment, its good that actions act positive with sentiment but we have to take into account all of the factors that are at work,” he says.
Keeping the repo rate (8%) and CRR (4.75%) unchanged the RBI surprised the street negatively in its June policy meet. Markets were expecting at least a 25 basis point reduction in both.
On the current deficient monsoons, Gokarn says the first two weeks of July are most important with respect to adequacy of the rains. As we are still in the early part of the monsoon period, the RBI is watching it closely as everybody else is to see what progress it’s making. Monsoons have however made some progress over the last two-three days and it’s a factor that the apex bank will obviously be paying close attention to as it heads to the July 31 credit policy meet.
Gokarn says he is in no position to make judgments on the progress of the monsoon. “We rely on the meteorology department for a forecast but if there is a problem clearly that is something that we need to take into consideration.”
On the present liquidity conditions, he says it will remain right for the April-June quarter as the 125 bps CRR cut and substantial OMOs have eased situation sequentially. Even as the rupee appears to be showing some strength these last few days, he doesn’t think one can directly correlate the rupee movement with the OMOs.
“OMOs are being driven by judgments about liquidity conditions and they will continue to be driven by judgments over liquidity conditions. Whatever is causing liquidity stress whether it is foreign exchange markets or something else, we are focused on maintaining liquidity conditions within the comfort zone that we stated and that will continue to be the benchmark against which we decide whether to do OMOs or not,” asserts Gokarn.
He feels that there are clearly some positive cues from the global front particularly after the EU Summit which has contributed and there are also some positive developments on the domestic front in terms of expectations of policy action which also may have contributed and in particular, the expansion of ceilings on FII investment at some point, that money is also likely to start coming in.