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Concerns, yes, but no monetary steps to reduce CAD, says RBI

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SummaryThe Reserve Bank of India is concerned about the current account deficit, but will not use monetary measures to bring down CAD, said governor Subbarao.

The Reserve Bank of India is concerned about the current account deficit, but will not use monetary measures to bring down CAD, said governor Subbarao.

“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.


No second recast tag for SEBs undergoing restructuring

Recast Woes

RBI will not deem the restructuring package of the government for state electricity boards (SEBs) as second restructuring and will give the benefit of asset classification for the loans, said deputy governor Anand Sinha.

“The issue was whether to treat as second restructuring or not, obviously the recourse was not to treat and we have agreed to that because the first restructuring which was done in three states had just been done and that restructuring one cannot say has failed,” said Sinha in a conference call with analysts.

In September, the government had announced a package to aide SEBs wherein 50% of the loan will be taken over by the state governments in 2-5 years and as an interim measure, it would be converted into bonds. For the remaining 50% of the loan, banks would be asked to extend the tenure to 7-10 years which

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