In his last monetary policy announcement before retiring as Governor of Reserve Bank of India, D. Subbarao on Tuesday chose to leave interest rates unchanged so as to protect the rupee and keep inflation down. The RBI kept both the repo rate (at which it lends to banks) and the reverse repo rate (at which it sucks out liquidity from banks) unchanged at 7.25 per cent and 6.25 per cent, respectively. It also kept the cash reserve ratio (the portion of deposits banks are mandated to keep with the RBI) unchanged at 4 per cent.

The RBI cut the economy's growth rate forecast to 5.5 per cent from 5.7 per cent for fiscal year 2013-14.

Fed policy

The risks posed by a likely tapering of the US Federal Reserve’s easy money policy and possible increase in real interest rates in the US, which could trigger flight of capital from emerging markets like India to safe haven US, saw Subbarao maintaining status quo on interest rates. “India, with its large current account deficit and dependence on external flows for financing it, will remain vulnerable to the confidence and sentiment in the global financial markets,” said Subbarao, who is set to retire in September after being at the helm of the apex bank for close to five years.

Though the current situation — moderating wholesale price inflation, prospects of softening of food inflation and decelerating growth — provided a reasonable case for continuing the easing stance, the RBI chose to remain cautious.

“I would like it (statement) to be read as the importance the RBI is attaching to containing volatility in the exchange rate,” the Governor said.

Lending rates

Though the short-term cost of funds has gone up for banks due to recent central bank measures to tighten rupee liquidity and check undue volatility in the foreign exchange market, banks may not raise lending rates as demand for loans remains tepid. Banks are also not expected to raise deposit rates either in a hurry. The situation could change only if the RBI’s liquidity tightening measures remain in place for long.

Sensex tanks

Reacting to the RBI’s announcements, the stock markets slipped. While the BSE bellwether Sensex tumbled 245 points to close at 19,348, Nifty fell 76.60 points to 5,755. Refinery, metal, auto, power and bank stocks weighed on the indices.

The rupee breached the crucial 60 mark to close at 60.48/dollar against the previous close of 59.43.

Yield on the benchmark 10-year government security carrying a coupon of 7.16 per cent rose about 12 basis points while its price fell by about 80 paise. Bond yields and prices move in opposite directions.

Rupee trading weak by 29 paise at 59.72

Sensex trading flat; IT, capital goods stocks major gainers

(This article was published on July 30, 2013)
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