The Reserve Bank of India (RBI) says its stance on interest rates has not changed from that in April.
“We did cut rates in April, which was a signal that the stance (of tightening, till then) would reverse. Having done that, we also said the pace of this cycle would depend on how we saw the inflation risk play out. So, the stance has not changed; April did see a reversal of stance,” said Deputy Governor Subir Gokarn on the sidelines of an event here.
From that point, he also said, RBI felt inflation risks had tended to remain rather firm, so it was calibrating a response. It had cut key policy rates by 50 basis points in April, after which the repo rate stands at eight per cent and the reverse repo rate at seven per cent.
Gokarn also said inflation is clearly the primary focus of RBI. “It has been a primary factor in our calculations all along and will continue to be. We are also concerned about how it is going to play out in the future,” said Gokarn.
RBI had revised the wholesale price index (WPI) projection for March 2013 upwards to seven per cent, from 6.5 per cent in the first quarter review in July of monetary policy. “We will review that July figure and will change or not change, depending upon the circumstances. If it changes, then it will be announced in the quarterly review,” said Gokarn.
He views the same sort of risk on inflation that RBI had seen earlier, except that some of these have materialised and some are behind us. As an example, he said, “We have a much better handle on the impact of the monsoon on food prices. That may be slightly positive on some things and slightly negative on others. It clearly looks ahead at the impact on food productivity in the rabi crops. Late rains are typically good for the rabi crops. So, we may see some softening there. But oil is back in focus because Brent crude is at $110/115 a barrel range for some time, showing signs of stabilising.”
Last week, the government announced a rise in diesel price by Rs 5 a litre to check the fiscal deficit. This is expected to push up inflation. “Obviously, mathematically, inflation will go up as diesel prices go up. But there is a benefit on the fiscal side,” said Gokarn. The WPI for August rose to 7.55 per cent on an annual basis, compared with 6.87 per cent in July.
RBI had cut banks’ Cash Reserve Ratio (CRR) on Monday by 25 basis points, to 4.5 per cent.
Explaining the rationale, Gokarn said, “Typically, during the festive season, liquidity tends to tighten a bit. Given that, there have been policy actions and it is consistent with what we have been looking at fiscal correction to some extent. We didn’t want liquidity to become a constraint to the extent of what impact these actions would have on economic activity.”
The CRR cut has not ruled out purchase or auction of gilts by RBI. “OMOs (open market operations) have always been very practical. When the situation has been tight, we felt that the pressure might persist, we have used OMOs. But OMOs are not planned in advance, they are a response to a particular situation,” said Gokarn.
On the impact of the third round of quantitative easing (QE3) begun by the US Federal Reserve, he said there might be some corrections on the rupee against the dollar but the concerns on the impact that the strengthening rupee might have on the currency’s competitiveness was not as acute as after the second round (QE2).
