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The Reserve Bank of India (RBI)'s policy announcement on Tuesday was completely on expected lines, with no changes in key policy rates. What comforted markets was the fact that RBI clearly articulated the recent liquidity tightening measures were only aimed at stemming the volatility in the currency, and these measures would be withdrawn when the central bank was convinced stability in the foreign exchange market was restored.
This is a considerably more dovish or milder stance compared to the earlier policy announcement. Thus, the window of opportunity for some easing of interest rates in the latter part of the year remains. Bond yields, which had spiked sharply following RBI's liquidity tightening measures, softened after the policy announcement.
The external sector remains the key concern, with RBI reiterating the current account deficit (CAD) has been at unsustainable levels for about three consecutive years. Another concern pertains to the rising food inflation, resulting in the consumer price index once again nearing double digits. For these reasons, RBI has opted to be more cautious in its GDP forecast, lowering it from 5.7 per cent to 5.5 per cent for FY14.
RBI has rightly emphasised structural measures are urgently needed for external sector stability and to reduce vulnerabilities caused by a large CAD. These measured include boosting exports, reviving industrial production, removing supply-side bottlenecks in the infrastructure sector and improving the overall investment climate. RBI does well to caution global financial markets may be volatile and unpredictable in that they would react to any further announcement of the tapering of quantitative easing by the US Federal Reserve. Given the difficult circumstances, Governor Subbarao has articulated RBI's stance well.
Keki Mistry
Vice-chairman & CEO, HDFC
