RBI Credit Policy: Leaves key rates unchanged, reflects no hawkish stance

Moneycontrol Bureau

The Reserve Bank of India (RBI) in its first quarter (April-June, 2013-14) monetary policy left key rates unchanged hinting at rate cuts in future subject to market stability. With this, D Subbarao, the governor who had taken the central bank assignment in September, 2008; presented his last quarterly policy before he hangs up his boots in September this year.   Current rates
The policy or repo, the rate at which banks borrow overnight money from the RBI remained at 7.25 percent. The reverse repo or the rate at which banks park their surplus money with the central bank stood at 6.25 percent. The cash reserve ratio or the portion of deposits banks keep with the RBI is at 4 percent.
The Marginal Standing Facility, a RBI borrowing window available to banks after exhausting the repo option, too remained at 10.25 percent, 300 bps above the policy rate. Dovish, not hawkish stance
"The current situation - 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," D Subbarao, the RBI governor said in the policy document.
"With upside risks to inflation still significant in the near term, however, the Reserve Bank indicated that 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," he said.
This means, the central bank is unlikely to change its policy stance from dovish to hawkish, scorching market speculations that the RBI might take tough policy measures (viz. rate hikes, not cuts) in the wake of high degree of exchange rate volatility. Risk factors
At the same time, it however, does not indicate any smooth sailing. The central bank considered the external sector risk as the biggest threat to aggravate the rupee-dollar currency movements. The Indian currency has already fallen nearly 6 percent between May 22 and July 26 due to capital outflows by overseas investors, who are nudged by the US monetary policy stance.
"It is not clear if financial markets have factored in the full impact of the prospective tapering of Quantative Easing or whether they will react to every future announcement of tapering. India, with its large CAD and dependence on external flows for financing it, will remain vulnerable to the confidence and sentiment in the global financial markets," the governor said.
The current account deficit (CAD), which moderated to 3.6 percent of GDP in January-March quarter in FY13, down from a record high at 6.5 percent in the preceding quarter. However, it stood at 4.8 percent, which is well above the level of 2.5 percent, recorded for three years in a row.
Meanwhile, the RBI's alacrity to tame the rate of inflation is not yet over.  Even though the wholesale price inflation (WPI) has slipped below the 5 percent mark, the comfort zone for the central bank, the consumer price inflation (CPI) continues to haut the RBI with near double digit rate (9.87 percent in June).
"During Q1 of 2013-14, the inflation trajectory has moved largely in line with these expectations, although some risks to the path of inflation have surfaced in June. The stronger than expected monsoon has not yet softened food inflation as much as it should have," said Subbarao adding that an low and stable inflation and well-anchored inflation expectations is necessary to sustain growth in the medium term.
He expressed concern over the weak investment climate. It was also reflected in the lower-than-expected non-food credit growth pegged at 14.3 percent as on July 12, as against projected 15 percent in FY14. GDP growth revised downwards
On back of subdued domestic industrial activities, RBI revised the country's GDP growth projection for FY14 by two notches to 5.5 percent from 5.7 percent recorded in the previous quarter.
"Activity, both domestic and global, has evolved in line with these expectations. While the onset of the monsoon and its spread have been robust, the persisting weakness in industrial activity has heightened the risks to growth," the governor said. Roll-back of liquidity measures
Recently, the RBI has taken a slew of measures to make domestic money dearer, which in turn, would inrease the demand for rupee - a favourable factor in the volatile exchange rate. In the policy, the RBI however, hinted at rolling back of those measures gradually as and when it senses some market stability.
"The recent liquidity tightening measures by the Reserve Bank are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation," Subbarao said. Also read: RBI tightens daily borrowing norms to douse rupee fire Past policy actions
Through FY13, RBI reduced repo rate by 100 bps, CRR by 75 bps and cut the Statutory Liquidity Ratio (SLR) obligation by 100 bps. The Apex bank has also conducted an open market operation (OMO) to buys back bonds worth Rs 1.50 lakh crore. Those measures were all aimed at easy monetary policy pumping in liquidity in the system. RBI's policy rate changes at a glance

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