 "Sunil Kaushal")
The Reserve Bank of India (RBI) has tried to strike the right balance between inflation management and liquidity requirements of the banking system. Containing inflation to foster growth in the long run continues to be the focus of the central bank. The unwinding of exceptional measures taken in July, by raising the marginal standing facility rate and lowering the liquidity adjustment facility, has largely been unwound. This puts us back in a business-as-usual mode.
The RBI governor has clarified the monetary policy would respond quickly to increasing inflation; therefore, we should watch for any trends on this front. Second, while the rupee has stabilised because of measures taken by RBI and the government, along with the deferment of the US Fed tapering, we need to be conscious that tapering is a question of 'when', not 'if'; it is likely to be back on the agenda in the first or second quarter of 2014.
This would result in renewed pressure on emerging markets and their currencies, and India would be no exception. When these are coupled with the approaching elections and the maturing of oil marketing companies' swap window, the first and second quarters of 2014 are likely to see another period of extreme volatility.
We should use this opportunity to build our forex reserves and address some structural challenges. We are also seeing secular growth in the US, Japan, Europe and China after seven years and this, along with the current levels of the rupee, would provide good support to exports. Liquidity conditions remain easy globally and banks and companies should use this window to execute their overseas capital and borrowing plans.
The fact that the market reaction to the monetary policy was 'according to expectations' was a compliment to the way RBI managed expectations. However, the governor would have his hands full with the challenges on inflation and, possibly, on the exchange front as well, as we approach what is likely to be volatile first and second quarters of 2014.
Sunil Kaushal
Regional Chief Executive (India & South Asia), Standard Chartered
