Faced with an unstable rupee, elevated retail inflation and uncertain global economic conditions, the Reserve Bank today said it will follow a cautious monetary stance, with focus on stabilising the domestic currency and containing the current account deficit.
Hinting at a status-quo in tomorrow's policy review, the RBI, in its Macroeconomic and Monetary Developments First Quarter Review 2013-14, said, "The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth."
The strategy, it said, will succeed only if reinforced by structural reforms to reduce the CAD and step up savings and investment.
"Amplifying macro-financial risks warrant cautious monetary policy stance," the RBI said, adding it will endeavour to actively manage liquidity to reinforce monetary transmission that is consistent with the growth-inflation balance.
Presently, the short-term lending (repo) rate, or the rate at which RBI lends to banks, is at 7.25 per cent, while the cash reserve ratio (CRR) is at 4 per cent.
A majority of RBI watchers expect the policy to be a "no show" event, but are looking forward to the guidance which Governor D Subbarao will give in the quarterly policy announcement, which would be the last before he demits office in early September.
A survey of external professional forecasters done by the RBI increased its median expectation on the value of the rupee to 59.5 to the dollar by March 2014 - about the same level at which the domestic currency currently trades. This compares with the earlier expectation of 54.
On the growth front, the RBI raised concerns, saying that the recovery is likely to be slower.
