Tuesday, 30 July 2013

RBI to actively manage liquidity to balance financial stability, growth and inflation

For the first time since the 1997 East Asian crisis, all focus would be on Reserve Bank of India’s (RBI) projection for the Indian rupee at the quarterly monetary policy on July 30, instead of interest rates. India’s central bank in its quarterly review of macroeconomic and monetary developments, highlighted that the priority for monetary policy now was to restore stability in the currency market so that macro-financial conditions remain supportive of growth, pouring cold water on even the little hopes of monetary policy easing, which could help boost Asia's third-largest economy, expanding at its slowest pace in a decade. RBI said it will endeavor to actively manage liquidity to reinforce monetary transmission that is consistent with the growth-inflation balance and macro-financial stability.

It shows that the central bank's policy focus has shifted from reviving economic growth to defending a rupee that hit a record low of 61.21, depreciated close to 10% from the start of this year, turning out to be one of the worst performing Asian currency. Further, RBI in its macroeconomic report said that global currency market movements in June-July 2013 have prompted a re-calibration of monetary policy.

India’s Apex Bank, so far, in a bid to curb Rupee’s slide, have taken measures including capping allocation of funds under LAF for each individual bank to 0.50% of its own NDTL, increasing marginal standing facility (MSF) rate and bank rate by 200 bps each to 10.25% and mopping up some liquidity through open market operations (OMO) sales and stipulating banks to maintain a minimum daily CRR balance of 99% of the average fortnightly requirement.

Meanwhile, RBI in its report, besides rupee depreciation has also pointed towards upward revision in fuel to be a reason causing upside risk to both wholesale and consumer price inflation. Moreover, the report indicates further drop in business confidence. RBI’s industrial outlook survey shows weakening of business sentiment in the first quarter of fiscal 2014 to a three- year low, though expectations showed improvement for the second quarter.

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