Mint Roads white flag in war for Rs seen as sign of weakness

Jul 31 2013, 04:16 IST
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D Subbarao, RBI governor D Subbarao, RBI governor
SummaryThe cash reserve ratio (CRR) maintained by banks remains at 4%

After shocking the markets with a double dose of liquidity tightening measures earlier this month, the Reserve Bank of India (RBI) on Tuesday sought to calm them, leaving key interest rates unchanged and indicating some of the measures aimed at checking volatility in the rupee may be rolled back in time.

The RBI move, however, appeared to have backfired with the rupee sliding sharply against the dollar in response to what was perceived as a weakened resolve to defend the currency; bond yields rose.

The recent liquidity tightening measures by the Reserve Bank of India are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign

exchange market, the RBI said in its guidance on monetary policy.

Together with the falling rupee, the RBIs lower forecast for growth in 2013-14 of 5.5%, down from the earlier 5.7%, disappointed equity markets the Sensex tumbled 245 points. The central bank, however, retained its outlook for wholesale price-based inflation at a level of 5% by March 2014, although it flagged upside risks to inflation on account of the weaker currency.

Bankers cautioned they may have to raise lending rates if the RBIs measures lasted longer than a few weeks, adding to the gloom. I think two to three weeks is the normal waiting time after which we will have to take a call, State Bank of India chairman Pratip Chaudhuri said.

C Rangarajan, chairman of the Prime Ministers Economic Advisory Council, told a television channel in response to the RBIs policy, Withdrawal of these measures will depend on the return of normalcy to forex markets. As and when capital flows return, the RBI should be able to roll back.

The central bank downplayed the possibility of a sovereign bond issue suggesting it was not appropriate at the current juncture. In the Reserve Banks view, costs of a sovereign bond issue, especially at the current juncture, outweigh the benefits. We should be doing a sovereign bond issue, if at all, when we are much less vulnerable than we are at this time, RBI governor D Subbarao said at a press conference after the policy announcement.

Acknowledging the country is facing headwinds on all fronts, the central bank said India was caught in a classic impossible trinity of trying to manage its exchange rate, free capital movement and yet maintain an

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