Concerns, yes, but no monetary steps to reduce CAD, says RBI
“We are not targeting CAD by way of monetary policy. We are trying to convey that CAD has implications for inflation, therefore, the conduct of monetary policy,” Subbarao said in a conference with analysts on monetary policy on Wednesday. At its third-quarter policy review released on Tuesday, RBI had cut the repo rate and cash reserve ratio by 25 basis points to 7.75% and 4% respectively, adding any further monetary easing would depend on CAD and inflation situation.
When asked which is the macro-economic variable that would influence the RBI’s decision the most, Subbarao said that RBI will look at all indicators, inflation, growth and the twin deficits closely. A fall in inflation alone will not trigger a rate cut unless CAD also moderates, he added. “It will be difficult to say monetary policy will look at inflation and be blind to other indicators,” he said.
On liquidity, deputy governor HR Khan said the central bank will not commit to a calendar of open market operations. “We don’t have the scientific basis for calculating liquidity through the year. We cannot commit to a calendar,” he said.
RBI has so far infused close to R1 lakh crore through both cuts in CRR and bond purchases under OMOs since April. Subbarao said RBI will continue to keep liquidity in deficit mode as it will be consistent with its policy stance.
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