The Reserve Bank of India’s decision to maintain a status quo on interest rates has been influenced by external sector considerations, specially widening current account deficit, Chairman of Prime Minister’s Economic Advisory Council C. Rangarajan has said.
“Yes, I think it is a difficult choice. The RBI has taken a cautious stand...the decision has been largely influenced by the external sector consideration. The current account deficit (CAD) is high and more recently the rupee has been under pressure. This appears to have been a major factor influencing the RBI to pass this stand,” Rangarajan said post-RBI policy announcement.
The Reserve Bank of India in its first mid-quarter policy review today kept the key interest rates unchanged because of elevated food inflation, rupee depreciation and uncertainty over foreign fund inflows.
He said going forward the price situation seems to be continuing and there have been some administered prices that needs revision.
“But even the depreciation of the rupee will have some impact on the price situation,” he added.
Rupee had hit an all-time low of 58.96 per US dollar last week on concerns that the US Federal Reserve might pull back its quantitative easing programme in a phased manner.
External factors
Rangarajan said that the developments on the external situation in the coming six weeks will determine RBI’s next policy review on July 30.
“If the capital flows are resumed and if the rupee is not under the kind of pressure it has been in the last few weeks, RBI would have an increased space to operate. I personally think that the external sector considerations will again be the predominant one even by the end of July,” he said.
CAD, which is the difference between the outflow and inflow of foreign currency, is estimated to be around 5 per cent of the GDP in 2012-13 fiscal. It had touched a record high of 6.7 per cent during October-December quarter.
Chief Economist Bank of Baroda Rupa Rege Nitsure said that RBI may ease the policy in the second half of 2013-14 conditional upon normalcy in monsoon and stability in currency.
“I see no scope for policy easing in H1, FY14 on the back of inflationary implications of currency depreciation, adjustment in administered prices and persistence of food imbalances,” she said.