After taking a series of steps to tighten liquidity to salvage the battered rupee,the Reserve Bank of India (RBI) on Monday indicated that the priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth.
With recent liquidity tightening measures,the RBI has curbed exchange rate volatility providing a temporary breather,the central bank claimed on the eve of the quarterly review of the monetary policy. It had recently hiked the marginal standing facility rate by 200 basis points to 10.25 per cent and increased the reserve requirements of banks to prevent a crash in the rupee.
The rupee closed 37 paise lower at 59.41 on Monday.
However,the RBI said,macroeconomic conditions have distinctly weakened during Q1 of 2013-14 and there is no evidence yet of recovery in growth even as headline inflation moderated. Consumer price inflation,especially food inflation,remains high,although a good monsoon should help in this regard. Business confidence remains low,as is evident from recent expectations surveys, it said.
The external sector is under stress, the central bank said in the Macroeconomic and Monetary Developments – First Quarter Review 2013-14.
Indranil Sen Gupta,India Economist,DSP Merrill Lynch (India),said,Will the RBI hold rates on Tuesday? Yes,in our view. It should signal its resolve to hold 60 rupee level for now. As of now,the July 23 measures have stabilised the rupee below 60 (although a weaker US dollar also helped). Still,the hard reality is that expectations cannot but float up to say,62 level,unless the RBI replenishes its armory by issuing NRI or sovereign bonds. On growth,the RBI said recovery may take time and is expected to shape slowly as the year progresses.
SBI chief for hiking CRR rate
State Bank of India chairman Pratip Chaudhuri has urged the Reserve Bank of India to hike the cash reserve ratio (CRR) in the monetary policy review on Tuesday.
The RBI should increase CRR to tackle the situation. Though the repo rate is officially 7.25 per cent,the effective repo rate in India is 10.25 per cent. The CRR is also effectively 4.25
per cent, Chaudhuri told The Indian Express.