MUMBAI (Reuters) - India's central bank left interest rates unchanged on Tuesday as it supports a battered rupee but said it would roll back recent liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.
Following are some of the comments made by Reserve Bank of India Governor Duvvuri Subbarao at a press meeting after the release of the monetary policy statement:
ON CASH TIGHTENING STEPS:
"I want to say that the Reserve Bank is sensitive to the short-term costs of tight liquidity measures on economic activity. And we are as anxious as everyone else to roll this back. But getting locked into a timeframe is both infeasible and inadvisable."
ON CURRENT ACCOUNT DEFICIT:
"We were talking about structural measures to contain the current account deficit, not so much about measures to finance the current account deficit. Of course that is an issue on which both the government and the Reserve Bank are in consultation and we are engaged in a discussion..."
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"But I believe that signalling that the government is taking measures to encourage exports, to boost exports and contain imports by some domestic policies, I think will be very important signal to contain volatility in the exchange rate. Because what we have done is actually find some space for a more durable adjustment and that space must be constructively used."
ON SOVEREIGN BOND ISSUE:
"In the Reserve Bank's view the sovereign bond issue - we have reservations about that. We have done a cost-benefit analysis of the sovereign bond issue. There are perceived benefits of bond issue, which will buffer your reserves and it will lower your interest rates, it will establish a benchmark for government borrowing and broaden the investor base."
"Those are standard textbook arguments in favour of a sovereign bond issue but there are costs. It will compromise our financial stability. There is lot of value to be attached to government's borrowing in domestic markets. We've learnt that lesson during the global financial crisis, we're learning that lesson now. Will we really get a lower interest rate because of sovereign bond issue, is not clear ... So in the Reserve Bank's view, the cost of a sovereign bond issue, especially in the current juncture, outweigh the benefits."
ON FOOD SECURITY BILL:
"Food safety implications, the quantitative implications of the food security bill are still being analysed. In the Reserve Bank we have to analyse ourselves. We depend on a lot of studies that are coming out from outside. Studies so far show that there may not be a significant increase in the amount of food to be procured even after the food security bill..."
"However, should those calculations be mistaken, certainly, there will be pressure on procurement, there will be pressure on subsidy, there will be pressure on fiscal deficit, that will have implications for growth and for inflation. There will be implications for the surplus income that the beneficiaries of food security might have and how much they might spend that and what implications that will have for inflation. So there is going to be lots of economic consequences of the food security bill, which in the Reserve Bank we have to study further."
ON INTEREST RATE CORRIDOR:
"Yes, corridor (between repo rate and marginal standing facility) has widened to 400 basis points. The width of the corridor signifies level of certainty. We had also said that we will honour this corridor of 200 basis points ... We have reduced the corridor sometimes during my governorship...Now that we have moved it, it certainly signifies that uncertainty has increased. Whether we make the corridor a key variable is uncertain, but we have been loathe to do that. We want to respect the width of the corridor as much as possible."
(Compiled by Neha Dasgupta, Shamik Paul and Suvashree Dey Choudhury)