RBI takes a pause, keeps repo, bank rates and CRR unchanged

Moneylife Digital Team 17 June 2013

Balance of payments and inflation and growth rate will determine future monetary stance, the central bank said

The Reserve Bank of India (RBI), in its mid-quarter review of the monetary policy on Monday, decided to keep key interest rates, cash reserve ratio (CRR) and repo rates

unchanged. According to economists, external risks, particularly weakness in the rupee, may have prevented the RBI from cutting rates.

The CRR stands at 4% and the repo rate has been left unchanged at 7.25%.

While the macro indicators were falling in place for the RBI to continue easing rates, rupee depreciation has now become a major hurdle to rate cuts. Sharp depreciation in rupee over the last couple of weeks, touching new record-lows of 58.98 against the dollar on 11th June, limits the possibility of rate cuts in the near term.

The RBI said the rupee fall, external sector risks and elevated food inflation are areas of concern which need to be addressed. Balance of payments and inflation and growth rate will determine future monetary stance, the central bank added.

In its statement on the monetary policy, the RBI said, “It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to

growth. While several measures have been taken to contain the current account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows.”

The large Indian current account deficit (CAD) and equity and bond outflows since the end of May make the currency price action precarious.

Given RBI’s previous hawkish rhetoric, and explicit focus on the current account deficit (CAD), the market was also not expecting any changes in the policy rates.

Sonal Varma, economist, Nomura Financial Advisory and Securities (India) Pvt Ltd, said, "In our view, while growth-inflation dynamics still call for rate cuts, rupee volatility and the ensuing concerns on financing the current account deficit are likely to determine monetary policy action. Hence, if rupee stabilizes and CPI inflation moderates, then rate cuts could follow, which is our base case view. On the other hand, if financing the current account is difficult, then rate cuts will likely be postponed further. We pencil in 50bp of cuts to the repo rate in second half of 2013 with CPI inflation and rupee likely to determine the timing of the moves."

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