MUMBAI (Reuters) - The RBI left interest rates unchanged on Tuesday as it supports a battered rupee but said it will roll back recent liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.
As expected, the Reserve Bank of India left its policy repo rate at 7.25 percent but took a dovish tone as it cut its growth forecast for Asia's third-largest economy to 5.5 percent for the fiscal year, from 5.7 percent previously.
It held the cash reserve ratio at 4.00 percent.
COMMENTARY
SEAN CALLOW, SENIOR CURRENCY STRATEGIST, WESTPAC, SYDNEY
"The RBI stands out in a world of central banks trying to talk down their currencies. Holding policy steady today was probably the best option for growth but quite a dose of luck will be needed to relieve pressure on the rupee and contain inflation without causing too much damage to the real economy."
DARIUSZ KOWALCZYK, SENIOR ECONOMIST EX-JAPAN ASIA, CREDIT AGRICOLE CIB, HONG KONG
"Its statement is less hawkish than expected and does not provide new fuel for any INR's rebound. The central bank revised down growth forecast for the current FY (to 5.5 percent from 5.7 percent) and WPI forecast (to 5.0 percent from 5.5 percent), and highlighted challenges in terms of the twin deficit.
"Defense of the INR partly reflects concerns over imported inflation and Fed's tapering off, and the bank said that there would be a case for policy easing were it not for the external concerns. It added that easing is on hold until FX market stabilizes, and once this happens, recent liquidity tightening measures will be rolled back and policy will refocus on supporting growth. Such stance means that equities should rise on relief no new liquidity measures were announced. Short money market rates should be stable.
"Their direction is now tied to the performance of the INR. We think the currency will weaken in the short run and markets will test the RBI again - we are going to test 60 soon - and possibly this will provoke new RBI measures as the bank's credibility is at stake now that it is targeting primarily the currency."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
"The RBI as expected has highlighted the downside risks to growth. But unless the currency stabilises they will not bring back growth on their radar and that is going to be a very gradual process. For rupee to stabilise both trade and current account deficit have to decline on a sustainable basis and that need not happen in the short term given the risk to growth and global uncertainties.
Going by the RBI's assessment in today's policy, it is clear FY14 will not be a qualitatively better year than FY13 given all the uncertainties. We could have the same growth as last year or a tad better but not qualitatively better. The cash tightening measures will not directly impact growth but aggravate the downward trajectory which is already being seen in growth."
SACHA TIHANYI, SENIOR CURRENCY STRATEGIST, SCOTIABANK, HONG KONG
"I think that it is quite evident that they are acknowledging that if the external environment was not as challenging for INR, their monetary policy decision would have been different.
"The GDP revision is not a huge surprise given that growth momentum continues to be sluggish. It also likely reflects the negative impact of the tighter liquidity conditions that India is imposing on its banking sector.
"I am still bearish on INR in the short term, there is Fed risk on the horizon. More measures will be implemented if the RBI senses that INR-bearish speculative fervour is pushing the currency too hard."
ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET MANAGEMENT, MUMBAI
"Overall, the policy sounds balanced, leaning towards dovishness. Although they have not guided on the timeline, they have stated that as INR stabilises these liquidity tightening measures will be reversed.
"Market will look for the INR movements for further signals. May be we should expect some more measures by the government in terms of increasing capital flows."
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI
"The document is ambiguous and it is not consistent with the measures they've taken. Because objectives keep shifting, it is very difficult to read too much into the guidance.
"I was expecting them to stick to the point that since macro-economic stability is important, they've tightened policy right now and till the time these pressures continue, policy will remain like this without mentioning about growth."
UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI
"While the monetary tightening measures are expected to last as long as rupee volatility persists, RBI has also sounded off the need to continue with requisite measures to support growth after the rollback. We continue to expect a 25 bps cut in repo rate in the last quarter of FY14."
S. NAREN, CHIEF INVESTMENT OFFICER, ICICI PRUDENTIAL ASSET MANAGEMENT LTD, MUMBAI
"Effectively they said that the day they get control on the currency there will be scope for starting to ease liquidity and support growth, which is what we expected.
"Ever since the first monetary policy shock, it has become very attractive for longer term investment in fixed income markets while equity has become increasingly volatile, we believe that should continue."
ANJALI VERMA, ECONOMIST, PHILLIPCAPITAL, MUMBAI
"The policy overall looks dovish. The RBI clearly would have had a loosening stance if the currency concerns were absent. I do not think the RBI will reverse the current tightening steps till the rupee remains around the 60 to a dollar level. Only the issue of NRI bonds or an extended period of loosening from Fed can reverse the rupee's fortunes."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI, MUMBAI
"The policy statement is slightly more dovish than what we had expected. The Reserve Bank of India has clearly stated that the cash tightening steps will be reversed in a calibrated manner. Supporting growth is a priority for the RBI.
"We expect that within two months, the cash tightening steps will be faded out, and monetary easing will resume. We are expecting another 50 basis points cut in the repo rate in 2013."
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
"Our sense is 58-59/$1 level will broadly be seen as comfort level for rupee. And, any trading above 60/$1 would once again get RBI in a cautious mode. As such, we may have to wait beyond a few weeks to see the rollback of these measures. In terms of a rate cut, I don't think there is any clear signal for a rate cut, I think status quo is likely.
"Continuing from it (RBI) said yesterday, reforms are a must, a pre-condition to be able to contain CAD. What actually gets our attention, is the statement that India should use tightening as an opportunity to narrow CAD.
"Quite clearly macro-financial stability and rupee stability have taken precedence in the policy considerations. And once there is stability growth would come back."
MARKET REACTION
The benchmark 10-year bond yields and overnight index swap (OIS) rates fell after the policy review, although the rupee weakened slightly.
Benchmark 10-year bond yields dropped 13 basis points to 8.03 percent from levels beforehand. The 1-year OIS rates fell 11 bps to 9.20 percent, while 5-year OIS rates shed 7 bps to 8.26 percent, according to pricing provided by dealers.
Banking shares gained, sending the NSE bank sub-index up <.NSEBANK> up 1 percent from its previous close, compared with a 0.3 percent gain in the broader NSE index <.NSEI>.
The rupee weakened slightly to 59.71 from around 59.55 before the RBI's decision.
Full coverage http://in.reuters.com/subjects/rbi-policy-review
RBI's policy statement http://rbidocs.rbi.org.in/rdocs/notification/PDFs/FS071301BC69D991.pdf
BACKGROUND
- India must ensure its moves to stabilise the rupee do not stifle growth, Chief Economic Adviser to the finance ministry Raghuram Rajan said on Monday, a day before the Reserve Bank of India meets on monetary policy.
- If one thing is clear from India's impulsive strategies this month to defend a plunging currency, it is that the central bank's policy bias towards supporting growth is innate, even in a crisis.
- Last week the central bank took new steps to support the rupee, signalling it will stay the course with its defence of the currency despite the risks to economic growth.
- A recovery in developed markets later this year will boost India's flagging economy, but growth will be lacklustre at best as the central bank refrains from cutting interest rates in order to keep a battered rupee currency from falling further.
- India is considering calling on its millions of non-resident citizens to help reverse a record slide in the rupee.
(Reporting by Treasury, Markets teams; Editing by Ranjit Gangadharan)
