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The Reserve Bank of India (RBI) kept key rates steady in its first bi-monthly review of the Monetary Policy on Tuesday, which according to experts, was on expected lines. However, the central bank did voice concerns on inflation. Upasna Bhardwaj, economist, ING Vysya Bank in conversation with Jinsy Mathew shares her opinion on the policy statements and the road ahead for the economy. Edited excerpts:
Was there any surprise in the first bi-monthly Reserve Bank of India’s (RBI’s) policy review?
Broadly, the decisions were on expected lines in terms of rates and the forward guidance tone. However, the steps taken on liquidity front were definitely not expected at the moment. While, there is not much change in funding to banks, none-the-less, what the Governor has done is to reduce the overnight availability of fund at the repo rate and increased the 7 and 14 day tenure through term repos by 0.25%.
RBI governor sounded cautious on the sticky food inflation. Do you see a case of a spike in food inflation in the near future?
Currently, there is an uncertainty on food inflation side, if we were to consider the untimely rain and hailstorms that have occurred which has led to some amount of crop damage and postponement of harvest. Also, there is a possibility of El Nino effect. Both the uncertainties taken together, definitely, there is a lot of upside risk to food inflation as we go ahead over the next quarter.
The GDP (gross domestic product) estimate for FY15 remains between 5-6%. Do you see this achievable target?
Once the new Government is in place, there would be some quick policy decisions that would help initiate some of the economic activity which has come to a stall. As a result, I would tend to agree to the 5-6% range. My personal estimate for the year for GDP growth stands at 5.5%.
Current account deficit (CAD) has narrowed to 0.9% of GDP in Q3 of 2013-14. Do you see its time to rollback some of the curbs put in place last quarter?
I believe that some of the restrictions particularly on Gold would be relaxed over the next few months. And once that takes place, it would be interesting to see if the gold demand bounces back. While, in volume terms we may see that gold demand may return, we need to also keep in view the fact that gold prices have corrected as compared to last year. That would help in capping sharp upside to gold imports. So, to an extent I would say the volume v/s value terms offsetting effect to play out.
Bond markets have remained steady even when the equity markets have run-up on hopes that the worst is over for the economy. That optimism is not reflected in the bond prices. Do you see a correction coming in the bond market?
Now that the bond supply has started to hit the market beginning this Friday, we will start seeing to movement in the bond market. At the same time, policy was closely awaited because forward guidance is very important. So, I would say now is the time when we would some volatility in rates, break from the range bound movement that we were seeing in the bond market thus far.
How do you see the Rupee panning out? There have been some suggestions that RBI should be buying dollars. Do you subscribe to this suggestion?
The sub-60 level is not here to stay for too long. At sub-60, the RBI will be cognizant of the fact that going ahead there is uncertainty as a result of which it is best to build up its coffers now. At the same time the kind of competitive advantage that India has achieved because of the depreciation in currency over the past one year, is not something which we are not in a position to lose out at the moment. Hence, the central bank would like to curb the sharp gain and not let Rupee sustain below 60 for too long. That is not really ruling out a sub-59 level, but only a brief rally, I would expect if elections were to throw some positive surprise.
