RBI chief against sovereign bonds; inflation risk persists

Moneycontrol Bureau

Amid talks of a sovereign bond issue, which is likely to attract overseas investments, the Reserve Bank of India (RBI) governor - D Subbarao expressed reservation against such move citing the timing of the issue and its impact on financial stability.
The central bank on Tuesday declared its first quarter credit policy and kept rates unchanged.
"A sovereign bond issue would compromise financial stability, and the cost of a sovereign bond issue outweighs the benefits at current juncture. Sovereign Bond Issue should happen at a time of strength," Duvvuri Subbarao, governor of the Reserve Bank of India said in a post-policy conference with reporters.
A sovereign bond issue means, a country will issue bonds for overseas investors who are expected to invest in those based on credit ratings and country's fundamentals. If India issues such bonds with BB- ratings, it will get overseas capital, which in turn, help the rupee to gain against the US dollar.
Similarly, the governor was also against the idea of raising loans from International Monetary Fund (IMF). Speculations are rife that the government is toying with the thought of applying a loan from the world body. Early 1990s, the government of India had sought the same to bail out the country from utter financial crunch. Forex reserves had hit 1.5-2 months low. Also read: Dovish RBI! How soon will it rollback INR tightening steps?
In the policy document released earlier today, RBI had indicated that moderating wholesale price inflation, prospects of softening of food inflation consequent on a robust monsoon and decelerating growth would have provided a reasonable case for continuing on the easing stance, but volatility in rupee emerged as key roadblock in softening of rates.
"Rapid fall in rupee put us in vicious spiral…the weakening of the rupee is the biggest risk to inflation," Subbarao said. Earlier in the day, the central bank it would roll back recent liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.
In the conference he reiterated that the central bank would persist with forex steps till it gets result. He however agreed that RBI was as anxious as everyone else to roll back tight liquidity steps it had introduced earlier this month to prevent excess volatility in the foreign exchange market.
The central bank had tightened liquidity further and made it even harder for lenders to access funds with measures including lowering the amount banks can borrow or lend under its daily liquidity window.
Subbarao further stressed that the central bank was anxious to return to policy supporting growth and he hoped that situations changed soon.
(With inputs from Reuters)