Keeps interest rates the same.
By R. Chandrasekaran
CHENNAI: The Reserve Bank of India (RBI) has decided to keep the interest rates same and tied the roll-back of its recent measures that are termed as tightening of money policy to the Indian currency’s might. The regulator has also left the compulsory reserve requirement unchanged.
However, the central bank has made it clear that its immediate concern is the rupee’s volatility and wants to take additional measures to stabilize the Indian currency. The banking regulator also wanted to ensure that calibrated actions are taken to control the current account deficit, which is threatening to deteriorate further in the absence of strong inflows of money from the foreign investors.
The RBI has also slashed its gross domestic product (GDP) estimate for the current fiscal year 2014 to 5.5 percent from 5.7 percent projected earlier. This is obvious considering that it has reduced money supply to support the rupee at the cost of growth.
The central bank’s current interest or repo rate is 7.25 percent. The bank’s regulator has reduced key rates in its May review meeting and left the rates same in its June meeting. The cash reserve ratio (CRR) is also allowed to remain at 4 percent.
There were some expectations in few quarters that the RBI will increase the interest rates or at least raise the CRR from the current level. However, most of the bankers and experts believed that the regulator will keep the rates and CRR unchanged. This is because of the fact that it has already taken up several measures in the recent past to arrest the weakening rupee from sliding further.
The RBI Governor Dr. D. Subbarao would have probably chaired the last review meeting as he is set to retire soon. In the recent policy review, the central bank has cautioned that all its efforts to stabilize the Indian currency will blow away if the government fails to take effective steps to cut down external trade imbalances.
In the June quarter Macroeconomic and Monetary Developments review, the central bank has voiced its concern that it will not be an easy economic recovery since the business confidence is low and the increase in interest rates worldwide has the potential to throw the financial markets out of its wind.
The central bank’s review indicated, “While recent liquidity tightening measures instituted by the Reserve Bank to curb volatility in the exchange rate provide at best some breathing time, it is important to push through structural reforms necessary to inspire the trust and confidence of both domestic and foreign investors.”
The RBI has also indicated that it can roll back its recent measures only when the Indian currency starts stabilizing. However, it failed to provide any time frame.
TO contact the author, email to rchandrasekaran@americanbazaaronline.com