RBI monetary policy review: Rupee fear makes cbank leave interest rates unchanged

Jul 30 2013, 23:18 IST
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SummaryRBI has forfeited monetary policy discretion to address external sector concerns.

The Reserve Bank of India (RBI) at its monetary policy review meet on Tuesday left interest rates unchanged as it sought to support a battered Indian rupee but said it will roll back recent liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.

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As expected, the Reserve Bank of India left its policy repo rate at 7.25 percent but took a dovish tone as it cut its growth forecast for Asia's third-largest economy to 5.5 percent for the fiscal year, from 5.7 percent previously. It held the cash reserve ratio at 4.00 percent.

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The RBI said recent liquidity tightening steps "will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation."

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The last policy statement of RBI Governor Duvvuri Subbarao's five-year tenure, unless it is extended, continued to call on the government to take urgent steps to bring down the current account deficit, which hit a record 4.8 percent of GDP in the last fiscal year. The current account gap makes India especially vulnerable as global investors move away from emerging markets in anticipation of a winding down of loose U.S. monetary policy.

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Turkey, Brazil and Indonesia have all raised rates to counter capital outflows. Indian policymakers will be hoping the U.S. Federal Reserve doesn't spark a fresh surge in flows away from emerging markets when it holds its policy review this week. "It should be emphasised that the time available now should be used with alacrity to institute structural measures to bring the CAD down to sustainable levels," Subbarao said.

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However, New Delhi has struggled to implement steps to attract foreign corporate investment, and with elections due by May, Prime Minister Manmohan Singh's weak coalition government has limited room for pushing through further reforms. The rupee fell to a record low 61.21 to the dollar on July 8, when it was down

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