RBI focus on rupee, may keep rates high
Rupee is the priority. Rate cuts can wait.
That seems to be the focus for the Reserve Bank of India (RBI) governor Duvvuri Subbarao as he prepares to present possibly the last monetary policy before his term comes to an end in September.
“The priority for monetary policy now is to restore stability in the currency market so macro-financial conditions remain supportive of growth,” the RBI said in the pre-policy macroeconomic review on Monday.
So, expect your EMIs to remain elevated with the central bank all but ruling out a cut in its key lending rate in the review on Tuesday.
Appropriate “structural reforms” policies need to come along with the RBI’s monetary measures to steer India out of a web of economic mess: from a free-falling rupee to a crippling industrial deceleration.
The RBI obliquely hinted that the government hadn’t done enough to boost investors’ confidence, vital to spur investment and boost spending to reverse the decade-low slowdown in the Indian economy.
“While recent liquidity tightening measures instituted by the RBI to curb volatility in the exchange rate provide at best some breathing time it is important to push through structural reforms necessary to inspire the confidence of investors,” the macro review said.
A government, desperate to spur investment and stem the rupee’s slide, relaxed the investment caps for foreign investors in a range of sectors earlier this month including telecom, high-tech defence production and insurance.
The RBI said its strategy of supporting the currency would “succeed only if reinforced by structural reforms to reduce the current account deficit (CAD) and step up savings and investment”.
The rupee has fallen more than 13% since May forcing the RBI take a string of steps.
It has capped the amount of short-term money banks can borrow from RBI. Lower cheap money from RBI will make funds costlier for banks, dimming hopes of an interest rate cut.