In view of enhanced stress on the Indian rupee in the exchange market and the resultant ongoing liquidity squeezing measures to contain rupee depreciation and volatility in the exchange market, RBI has kept policy rates unchanged in its Q1 review of monetary policy announced on July 30, even as moderating economic growth and WPI inflation suggested easing of the policy rates.

Repo rate stands at 7.25 per cent, reverse repo rate at 6.25 per cent, and MSF and bank rates at recently hiked 10.25 per cent. CRR, too, remains at 4 per cent. Earlier, in a major reversal of monetary easing initiatives, RBI had raised MSF and bank rate by 200 basis points on July 15 and put a ceiling of Rs.75,000 crore (1 per cent of NDTL) on borrowing under LAF. Subsequently, on July 23, the overall limit for access to LAF by each individual bank was reduced to 0.5 per cent of its NDTL and CRR requirement on daily basis was hiked to 99 per cent, from 70 per cent earlier.

RBI’s monetary policy stance over the last two years has been shaped by the growth-inflation dynamic even as external sector concerns have had a growing influence on policy calibration over the last one year. 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, the apex bank says. However, with massive sale-offs by FIIs in debt markets leading to relatively sharp depreciation of rupee value against major global currencies, the country is currently caught in a classic ‘impossible trinity’ trilemma, which has forced, RBI says, curtailment of some monetary policy discretion in order to address external sector concerns.

Knowing that liquidity restricting measures could hurt growth if continued for prolonged period, the apex bank has said that liquidity tightening measures will be rolled back in a calibrated manner as stability is restored to the foreign exchange market. For this, it has called for structural measures to bring the CAD down to sustainable levels. Despite the moderation in the CAD in Q4, the overall CAD was at an unsustainable level of 4.8 per cent of GDPmp during 2012-13 and it was likely to remain elevated in Q1 of 2013-14.

RBI REFERENCE RATES (Rs. PER UNIT OF FOREIGN CURRENCY): APRIL-JULY 2013
 
USD
GBP
Euro
Yen
April
Low
53.9423
82.0478
69.5881
54.31
High
54.8803
84.2325
71.415
58.56
May
Low
53.7355
83.3141
70.4994
56.03
High
56.4958
86.0092
73.6807
53.5
June
Low
56.4238
92.9178
78.9412
61.79
High
59.8538
86.1509
73.6405
56.35
July
Low
59.3623
89.52
77.066
59.01
High
61.115
92.9742
80.9535
62.44

Outlook
While the onset of monsoon and its spread have been robust, the persisting weakness in industrial activity has heightened the risks to growth. Moreover, global growth has been tepid, with some signs of loss of momentum in the US and in EDEs on top of the ongoing contraction in the euro area. Taking these and other developments into account, the growth projection for 2013-14 is revised downwards from 5.7 per cent to 5.5 per cent.

The sharp depreciation of rupee since mid-May is expected to pass through in the months ahead to domestic fuel inflation as well as to non-food manufactured products inflation through its import content. The timing and magnitude of the remaining administered price revisions are also a source of uncertainty for the inflation outlook. RBI says it would strive to see that the WPI inflation is contained at 5 per cent by March 2014.

M3 growth projection for 2013-14 has been retained at 13.0 per cent and aggregate deposit growth at 14.0 per cent. Non-food credit of SCBs is projected to grow at 15.0 per cent. As always, these numbers are indicative projections and not targets, RBI underlines.

Risk factors
The biggest risk to the macroeconomic outlook stems from the external sector and fallout effect on rupee value. Most external vulnerability indicators have deteriorated, eroding the economy’s resilience to shocks.

The investment climate remains weak and risk aversion continues to stall investment plans. The outlook for investment is inhibited by cost and time overruns, high leverage, deteriorating cash flows, erosion of asset quality and muted credit confidence.

For low and stable inflation and well-anchored inflation expectations, it is critical to ease the supply constraints in the economy, particularly in the food and infrastructure sectors. This calls for policy actions on a wide range of fronts.


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