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The Reserve Bank of India (RBI) on Wednesday assured the bond market once again that the Rs 50,000 crore debt switch programme will be done “conditional on stability in the market”. In a post monetary policy conference call RBI governor Raghuram Rajan said, “It will done conditional on stability in the market. Therefore, it is a very contingent policy.”
At 12:40pm the yield on the 10-year benchmark government bond was trading at 8.70% compared with previous close of 8.75%.
RBI also assured the street that the re-payments for oil swaps that will come by end-March are well covered. “Between end-February and end-March about 50% of oil swaps will come due and beyond that another 50%. At this point I can say that at least the re-payments for March are well covered,” said Rajan.
The announcement comforted the Indian currency. At 12:40pm the rupee was trading at Rs 62.12 compared with previous close of Rs 62.52 per dollar.
RBI also defined a bank on the Consumer Price Index (CPI) inflation. “We first have to see what will happen by the end of this year on the CPI headline number. Whether we reach the target earlier or not, we may and that’s a good thing. We have a projection around 8% with a band of 7.5% to 8.5%,” said deputy governor Urjit Patel. According to Patel there is a fair bit of uncertainty and RBI feels that the central estimate is likely to be achievable with all things being equal with the policy action that has been taken over the last few months and not just yesterday. “Regarding core inflation we have not made projections explicitly. We have some internal working numbers. The glide path is based on CPI headline,” added Patel.
According to Patel the forward guidance that was given in December has been followed though in January in spirit. “There were two conditions that had to be met and one of them did not. That was with core inflation. What we did yesterday was consistent with what we did in December. The fact of the matter is that whether the headline was 11.2% in December and 1.5% less now, they are both at double digit level. So in terms of the glide path of reaching 8% within 12 months and 6% within 24 months, the action that was taken yesterday is perfectly consistent with what has been written in the report,” he said.
With headline inflation coming down, RBI believes core inflation will also fall. “Our belief is that as we bring down headline inflation, core will come down accordingly. But the reason we have talked about core CPI for sometime is precisely to demonstrate that it is not just food inflation, there are other aspects of inflation that has been picking up,” said Rajan.
