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‘Re pain may force RBI to maintain status quo’

Jul 29 2013, 01:43 IST
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SummaryA rate cut to prop up sagging growth is unlikely when the Reserve Bank of India (RBI) unveils the first quarter monetary policy review on July 30 as focus will be more on supporting the battered rupee, said bankers and economists

A rate cut to prop up sagging growth is unlikely when the Reserve Bank of India (RBI) unveils the first quarter monetary policy review on July 30 as focus will be more on supporting the battered rupee, said bankers and economists.

July 30 will be a “non-event” as RBI Governor D Subbarao will leave the repo rate, or the rate at which RBI lends to banks, unchanged at 7.25 per cent, while the cash reserve ratio will also be retained at 4 per cent, they said.

They, however, added the central bank is likely to give some more clarity on its tightening to stem the fall of rupee. “I think the status quo will be maintained by the RBI in its policy stance,” said VR Iyer, chairperson of Bank of India.

Dena Bank chairman and managing director Ashwani Kumar said he doesn’t expect RBI to increase rates.

Chief economist at Care Ratings Madan Sabnavis said considering the tightening the RBI has taken in the past two weeks to contain volatility in the forex market, it is unlikely that the Governor will take any measures that will upset the gains achieved on the forex front, even though inflation has come down to comfortable level.

The wholesale-priced based inflation was 4.86 per cent in June, within the RBI’s comfort zone.

However, with the rupee plummeting to new lows, the chances of the central bank reducing rates further are dim, economists said.

The central bank had announced various steps to save the battered rupee which touched a life-time low of Rs 61.21 to the dollar on July 8 on concerns over widening current account deficit and early withdrawal of easy money by the US Federal Reserve.

To stem the fall, the RBI took several measures to tighten liquidity. It reduced the liquidity adjustment facility and also asked banks to maintain a higher average cash reserve ratio of 99 per cent of the daily requirement.

RBI had also increased short-term funding rates and announced sale of bonds.

“All monetary conditions which were responsible for speculative trading in the rupee has been curtailed by the RBI in last two weeks by tightening short-term liquidity. Any change in the CRR now will impinge on long-term liquidity, which RBI doesn’t want,” said Sabnavis.

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