The Reserve Bank of India said steadying the rupee to help preserve economic stability has become the priority for monetary policy and that more steps are needed to curb the nation’s current-account deficit.
“The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth,” the Reserve Bank said in an economic review before today’s rate decision in Mumbai. Such a strategy will work only if reinforced by “structural reforms” to reduce the deficit and spur investment, it said.
Governor Duvvuri Subbarao raised two interest rates in July, restricted daily fund injections into the banking system and tightened lenders’ reserve ratios, curbing rupee supply to stem the currency’s plunge. All except one of 32 analysts in a Bloomberg News survey predict he will keep the benchmark repurchase rate at 7.25 percent, in the last scheduled monetary-policy review due before his term ends in September.
“The RBI’s focus has shifted to curbing rupee volatility,” said Upasna Bhardwaj, an economist at ING Vysya Bank Ltd. in Mumbai. The recent steps taken by the central bank may hurt growth if they stay in place for an extended period, she said.
The central bank’s measures have contributed to an appreciation of about 3 percent in the rupee versus the dollar since the currency touched a record low July 8.
It weakened 0.6 percent to 59.42 at the close in Mumbai yesterday, while the yield on the 7.16 percent government bond due May 2023 fell to 8.13 percent from 8.16 percent on July 26. The S&P BSE Sensex index closed down 0.8 percent.
The rupee, which has depreciated about 10 percent in the past six months, has been hurt by India’s record current-account shortfall. The prospect of reduced U.S. monetary stimulus, which has spurred capital outflows in emerging markets from Indonesia to Brazil, has also weighed on the currency.
“Policy initiatives were taken in mid-July to address exchange rate volatility so that it does not risk macroeconomic stability and growth sustainability,” the Reserve Bank said.
The recent “liquidity tightening measures” provide “at best some breathing time,” it said.
The most important global risk is that “at some stage, exit from accommodative monetary policy in the U.S. may tighten global liquidity,” with implications for capital flows to nations including India, the Reserve Bank said.
India’s economy will expand 5.7 percent in the fiscal year through March 2014, based on a survey of forecasts from other organizations, yesterday’s report showed. The previous survey in May projected 6 percent.
Wholesale-price inflation will average 5.3 percent, the survey said, compared with an earlier 6.5 percent estimate.
Currency depreciation and rising fuel costs are among upside price pressures, the monetary authority said.
Subbarao on July 15 increased the marginal standing facility rate and the bank rate by 200 basis points to 10.25 percent. That contrasts with 25 basis-point repurchase rate cuts in January, March and May each to spur growth.
Gross domestic product growth slowed to a decade-low 5 percent in 2012-2013. Wholesale-price inflation in Asia’s third-largest economy accelerated to 4.86 percent in June. Consumer-price gains quickened to 9.87 percent.
The recovery in economic expansion may take time and is expected to take “shape slowly as the year progresses,” the central bank said in the report, adding “sustainable recovery requires control over consumer price inflation.”
The current-account deficit may have widened in April through June, it said. The gap is likely to remain above the sustainable level of 2.5 percent of GDP, the central bank said.
The government since September last year has eased restrictions on foreign-direct investment in industries such as aviation and retail, seeking to woo more stable inflows to help finance the imbalance.
To contact the editor responsible for this story: Shamim Adam at email@example.com