RBI Credit Policy: No rate cut; Subbarao says inflation has to fall first

Moneycontrol Bureau

The Reserve Bank of India (RBI) in its June mid quarter monetary policy review on Monday left its key policy (repo) rate unchanged at 7.25 percent in line with expectation. Cash reserve ratio (CRR) remained at 4 percent. The fear of inflation ghost primarily prompted the central bank to maintain status quo.

Repo is the rate at which banks borrow from the central bank. CRR is the portion of deposits that banks are mandated to keep with RBI.

"It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth," RBI said in the review statement.

"The monetary policy stance has been informed by the evolving growth-inflation dynamic, the balance of risks as well as recent developments in the external sector. The inflation outlook will be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices (MSP) as well as the recent depreciation of the rupee."

The headline wholesale price index (WPI) inflation stood at 4.7 percent, a 42-month low as against 4.89 percent in April. Similarly, retail inflation or consumer price index (CPI) also softened from 9.39 percent in April to 9.30 percent in May.

The Indian rupee dropped 7.5 percent against the US dollar since May, 2013. It had hit all time high at 58.99/USD on June 11.  Rupee depreciation increases import bills, which is eventually passed on to the domestic customers, leading to a rise in inflation. A one percent rupee depreciation is estimated to add inflation by additional 15-20 basis points.

At the same time, a higher volume of imports continues adding woes to the widening current account deficit (CAD), which had hit record high at 6.7 percent in October-December quarter.

Softer global commodity prices and recent measures to dampen gold imports, according to the central bank, are expected to moderate the CAD in 2013-14 from its level last year. The main challenge is to reduce the CAD to a sustainable level; the near-term challenge is to finance it through stable flows.

"While several measures have been taken to contain the current account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows. The Reserve Bank stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments," RBI said.

Federal Open Market Committee (FOMC), the US Federal Reserve's policymaking body,  is meeting on June 19. Everybody from equity, bond, currency markets is keeping an eye on this. So, is the RBI, which is also expected to take cues for its April-June quarter policy to be announced in July.

RBI's policy rate changes at a glance

Effective Date	Reverse Repo	Repo	SLR	CRR
June 17, 2013	6.25 (unchanged)	7.25 (unchanged)	23	4 (unchanged)
May 3, 2013	6.25 (-25)	7.25 (-25)	23	4
March 19, 2013	6.50 (-25)	7.50 (-25)	23	4 (unchanged)
February 9, 2013	6.75	7.75		4 ( - 25)
Jan 29, 2013	6.75 (25)	7.75 (-25)	23	4.25
Nov 3, 2013	7	8	23	4.25
December 18, 2012	7	8	23	4.25 (unchaged)
October 30, 2012	7	8	23	4.25
September 17, 2012	7	8	23	4.50 (-25)
August 11, 2012	7	8	23 (-100)	4.75
April 17, 2012	7 (-50)	8 (-50)	24	4.75
March 10, 2012	7.50	8.50	24	4.75 (-75)
January 24, 2012	7.50	8.50	24	5.50 (-50)

saikat.das@network18online.com