RBI leaves policy rates untouched
Inflation risks still high as rupee sags: RBI As feared by many, the Reserve Bank of India (RBI) has left...
Inflation risks still high as rupee sags: RBI
As feared by many, the Reserve Bank of India (RBI) has left the interest rates untouched on Monday in its policy review, claiming that the inflation risks are still high as the rupee received hardest hit in the last week.
While the policy repo rates left unchanged at 7.25 per cent, cash reserve ratio (CRR) steady at 4 per cent. The banking regulator pointed out that raising food prices and falling currency still pose inflationary risks. Though terming the fears raised by the central bank as hawkish, the analysts concurred with the views of RBI as the rupee under pressure with a negative note. More so, the CAD hitting 5.4 per cent of GDP in April-December period had put further pressure on the rupee.
Thus, till such time rupee is under pressure, RBI will fear on easing rate cut. As RBI stated in a statement, "It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth".
However, economists still find little room to moderate policy rate at lease in the future months. RBI further said, "The monetary policy stance has been informed by evolving growth-inflation dynamic, the balance of risks as well as recent developments in the external sector. The inflation outlook will be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices (MSP) as well as the recent depreciation of the rupee."
The headline inflation stood at 4.7 per cent, a 42-month low as against 4.89 per cent in April. On the same lines, even retail inflation also softened from 9.39 per cent in April to 9.30 in May. On the other hand, rupee had dropped about 7.5 per cent against US dollar since May 2013, and touched all time high at 58.99/$ on June 11. A one per cent rupee depreciation will add 15-20 basis points to inflation.
Though RBI agrees that the government has initiated various measures including containing CAD, the central bank still maintains risk perception and suggests more vigilant over global uncertainty, which impact on the capital inflows. RBI's cautioned approach is also due to the forth coming Federal Open Market Committee (FOMC), the policy body of US Fed, meeting slated on June 19, which may influence RBI's 1st quarter (April-June) policy statement in July.