RBI rebuffs markets by leaving rates, CRR unchanged
The Reserve Bank of India (RBI) on Monday left its repurchase rate (repo rate) and the cash reserve ratio (CRR) unchanged, belying markets' expectations of a fresh policy easing by the central bank in order to lift GDP growth. The markets reacted negatively to the RBI'> RBI's policy announcement. The stocks erased early gains to turn lower while the benchmark 10-year Government bonds too declined from day's high. The rupee also lost ground versus the US dollar. On the basis of an assessment of the current macroeconomic situation, the RBI has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8%. The CRR of scheduled banks has been left unchanged at 4.75% of their net demand and time liabilities. Consequently, the reverse repo rate under the LAF will remain unchanged at 7%, and the marginal standing facility (MSF) rate and the Bank Rate at 9%. The RBI said that it had front-loaded the policy rate reduction in April with a cut of 50 basis points in the repo rate. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives, the RBI said. "Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small," the RBI said in a statement.
Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures, the RBI said. Since the Annual Policy statement in April, global macroeconomic and financial conditions have deteriorated, the RBI said today. At the same time, the domestic macroeconomic situation too raises several deepening concerns, it added. While GDP growth in FY12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend, the RBI said. Management of liquidity remains a priority, the RBI said. Even as the liquidity situation converges to the comfort zone, the RBI said that it will continue to use Open Market Operations (OMOs) as and when warranted to contain liquidity pressures. The evolving growth-inflation dynamics will continue to influence the RBI's stance on interest rates, the central bank said. Core inflation has moderated, reflecting demand conditions and lower pricing power, the RBI observed. However, both headline and retail inflation rates are rising, which have a bearing on inflation expectations, it said. Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks, the RBI said. Finally, recognising that the global situation is turbulent, the RBI said it stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments.
Rupee hits record low…Sinks below 57 vs. USD
The rupee plummeted to a new all-time low versus the US dollar, as global investors continued to shun risky assets on disappointment about the Federal Reserve's latest stimulus and weak Chinese data on manufacturing. The rupee ended the week at 57.16 per dollar after touching a record low of 57.33 and a day's high of 56.7550. It hit a weekly peak of 55.27. The rupee had closed at 55.50 on June 15. The Federal Reserve may not have delivered a QE3 but the so-called "Operation Twist" plan - aimed at keeping rates low - has been extended to the end of the year. It was due to end this month. On the flip side, the Fed scaled down its projections of GDP growth and inflation while warning that unemployment will stay largely elevated. US markets closed virtually flat at the end of a choppy session. China's crucial manufacturing sector is likely to extend the ongoing contraction phase for an eighth straight month in June, with export orders and prices at their weakest since early 2009, according to the initial findings of a survey by HSBC. Private sector activity across the debt-plagued Eurozone shrank at the steepest pace in three years in June, a survey by Markit Economics showed. The RBI once again tried to arrest the freefall in the rupee but was not successful. There was some talk of the central bank asking state-run oil marketing companies to buy 50% of their dollars from a single nationalised bank but the same could not be verified. The sharp depreciation of the rupee over the last few months was driven by a combination of global as well as domestic factors and the future exchange rate movement will depend on fixing these issues, RBI Governor Duvvuri Subbarao said. While the high current account deficit and a widening trade deficit are the domestic factors, the ongoing Eurozone crisis is one of the crucial international issues responsible for the rupee depreciation, he said.
"While the rupee depreciated in the August-December period of last year due to global factors, the depreciation from March till date is due to both global as well as domestic factors," Subbarao said. The Brazilian Real has witnessed the largest depreciation among the BRIC nations during this period, followed by the rupee. Subbarao said that growing current account deficit, the relative inelasticity of imports and high inflation have negatively impacted the rupee. The central bank has taken various measures like increase in FII limits in G-Secs and corporate debts, deregulation of interest rates on NRE and NRO accounts and deregulation of ceiling rate on export credit among others to attract capital inflows in its bid to arrest the fall of the tottering rupee. On RBI’s intervention to support the rupee, Subbarao said that the central bank's stated policy is to check volatility and not to support any exchange rate level. "The RBI's policy intervention is only to smooth volatility and steep movements and this has worked for us till now and we will continue with that," he said. About possible appreciation of the rupee going forward, the Governor said that capital inflows, import restraints and higher exports along with solution to the Eurozone problem will determine the exchange rate movement in the near future.
Highlights of RBI Mid-Quarter Policy
RBI Mid-Quarter Monetary Policy Review: June 2012
Interest rates not sole reason for economic slowdown: RBI
Economic activity in FY12 moderated sequentially over the quarters to take growth to a nine-year low of 5.3% in Q4 FY12, though for the fiscal year as a whole it was 6.5%. Deceleration in industrial production from the supply side and weak investment from the demand side have, in particular, contributed to the growth slowdown, the RBI said in a statement. The index of industrial production (IIP) increased by just 0.1% in April 2012. "Even as the manufacturing Purchasing Managers’ Index (PMI) for May suggested that industrial activity remains in an expansionary mode, there is no question that the pace of expansion has slowed significantly," the central bank said. In this context, it is relevant to assess as to what extent high interest rates are affecting economic growth, the RBI said. Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08, the central bank said. "This suggests that factors other than interest rates are contributing more significantly to the growth slowdown," it said. Further, one implication of the rupee depreciation over the past several months is that domestic producers have gained in competitiveness over foreign producers, the RBI said in a statement. Over time, this should result in expanding exports and contracting imports, thus acting as a demand stimulus, it said.
Eurozone debt crisis continues to hurt global economy: RBI
RBI hikes limit of export credit refinance to ease liquidity
The Reserve Bank of India (RBI) has increased the limit of export credit refinance from 15% of outstanding export credit of banks to 50%, which will potentially release additionally liquidity of over Rs. 300bn, equivalent to about 50 basis points (bps) reduction in the cash reserve ratio (CRR). The rate of interest charged on the export credit refinance (ECR) facility will continue to be the prevailing repo rate under the Liquidity Adjustment Facility (LAF), which is currently 8%. At present, the ECR limit is fixed at 15% of the outstanding rupee export credit eligible for refinance as at the end of the second preceding fortnight. The move will come into effect from the fortnight beginning June 30, the RBI said. Management of liquidity remains a priority, the RBI said today, adding that it will continue to use open market operations (OMOs) as and when warranted to contain liquidity pressures. Although money supply (M3) growth has been slightly under the projected trajectory, credit growth has moved above the projected rate, the RBI said. Notably, the widening wedge between deposit growth and credit growth is intensifying liquidity pressures, the central bank said. However, the OMOs have substantially eased liquidity conditions, as is reflected in the stabilization of the overnight call money rate close to the policy repo rate, the RBI said.
Monsoon will play role in determining food inflation: RBI
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