rbi monetary policy may 2013-2014

7/27/2019 Rbi Monetary Policy May 2013-2014

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RBI MONETARY POLICY MAY2013-2014

20-JULY-2013


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Contents

Falling rupee may prompt RBI to revise inflation estimate up-wards

Hard to predict when rupee-USD rate will stabilise: RBI

Retail inflation up, merchandise exports, factory outputfall; RBI Cautious

RBI may cut key policy rates 50-75 bps this fiscal

RBI to maintain status quo on policy rates: Dun & Bradstreet

RBI could reverse gear if rupee recovers: Prime MinisterManmohan Singh


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Falling rupee may prompt RBI to reviseinflation estimate upwards

Economists are in the process of revising their Wholesale Price Index (WPI) in-flation estimates upwards for 2013-14 and are of the view that the Reserve

Bank of India (RBI) may also do so in a scenario when the rupee has been de-

preciating against the dollar. The street

also believes that further cuts in key pol-

icy rates looks difficult in this fiscal.

Since the start of this fiscal the rupee

has already weakened significantly and

experts see it weakening further in thetime ahead. The recent strengthening in

the Indian currency against the green-

back is considered temporary by them.

RBI governor D Subbarao said today in

Indore that it was difficult to say how

long the external problems affecting the

rupee would persist.

Subbarao also said that inflation remains high. According to him curbing infla-

tion remained RBI's most important task. He added that RBI has been able tocurtail inflation to some extent in the last two years.

The fall of the rupee by nearly 12 per cent since the beginning of May 2013

has raised the rupee price of crude oil and will get reflected in higher inflation

of internationally-linked fuels such as petrol. The rupees weakness has also

increased under-recoveries in diesel to Rs 10 per litre (as of July 8) from only

Rs 2.50 per litre in April. If the rupee remains at current levels, the monthly

diesel price hike will have to continue throughout 2013-14, said Dharmakirti

Joshi, chief economist, CRISIL in a note to clients.

According to Joshi in addition, keeping in mind the fiscal consolidation agenda,

the pressure to hike prices of other administered fuels such as LPG will also

rise. Input costs, particularly those of imported raw materials, have risen sig-

nificantly. As firms pass-through at least some of these cost increases to con-


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sumers, core inflation - measured by CRISIL Core Inflation Indicator will

begin to rise again.

RBI in its monetary policy statement for 2013-14 said in May 3 that WPI infla-

tion is expected to be range-bound around 5.5 per cent during 2013-14. The

policy documents also said that RBI will endeavour to condition the evolution

of inflation to a level of 5 per cent by March 2014.

But according to economists the RBI's projection for WPI may be revised up-

wards soon. Upward revision of WPI numbers from RBI is on cards. Whether

they will do it immediately or after monsoon assessment, that depends, said

Rupa Rege Nitsure, chief economist, Bank of Baroda. Nitsure's projection for

WPI inflation for 2013-14 is a tad above 6 per cent. Earlier she was expecting it

to be 5.3 per cent.

WPI inflation fell to 4.7 per cent in May from 4.9 per cent in April. The data for

June is due next week and according to Shubhada Rao, chief economist, YES

Bank, it will rise to 5.1 per cent driven by sharp upward movement in prices of

primary articles. Rao also revised her 2013-14 WPI estimate upward to 6 per

cent from 5.75 per cent earlier.


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Hard to predict when rupee-USD ratewill stabilise: RBI

On the back of the free falling rupee against the US dollar, the Reserve Bank of

India (RBI) is expected to contain the rate of inflation with top priority. Howev-

er, the inflation has come off sequentially, though not reached the central

bank's comfort zone.

"Inflation is still high. It is RBI's most important job to curb it. We have cur-

tailed inflation to some extent in the last two years. However, prices of food

items are still high," D Subbarao, RBI governor said on Thursday.

He was visiting a village called Kurda near

Indore, Madhya Pradesh. As a part of finan-cial inclusion programme, the central bank

decided to develop this village as a model

one. He also spent some time at a local

school interacting with the students.

The wholesale price based inflation (WPI) fell

to 4.7 percent in May 2013 as against 4.89

percent in April. The inflation in the food ar-

ticle category rose from 6.08 percent in April

to 8.25 percent in May.

Commenting on the rupee slide against the greenback, the RBI governor said, it

is difficult to say when the exchange rate is going to stabilize. There are both

external and domestic factors behind rupee fall. The current account deficit

(CAD) or imports in excess of exports, is a worry.

The Indian rupee last Monday hit a record low at 61.21 against the US dollar.

Since May, the local currency has lost around 15 percent to the US currency. It

has been the worst performing Asian currency. A depreciating rupee brings im-ported inflation. Importers, which are hit due to falling rupee, generally pass on

the higher cost of imports to the end-consumers.

Subbarao expressed concern over the country's CAD, which remained high.

CAD a year before FY13 was 4.2 per cent. In 2012-13, it was 4.8 per cent. It is

one of the key parameters of RBI's monetary policy.


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Retail inflation up, merchandise ex-ports, factory output fall; RBI Cautious

Gloomy macroeconomic data released on Friday set back hopes for an early re-

covery in Asias third largest economy, jolting a government thats already

struggling to contain the rupees rapid decline.

After four consecutive months of growth, factory output contracted 1.6% in

May while merchandise exports shrank 4.6% to $23.8 billion in June, reflecting

the weakness in external demand. The retail inflation rate inched up to 9.87%

in June compared with 9.31% in May, led by higher prices of vegetables and

protein-rich foods.

Adding to the gloom, car sales in India

fell by 9% in June to 139,632 units,

industry body Society of Indian Auto-mobile Manufacturers said on Friday.

Rising ownership costs and sluggish

economic growth have deterred poten-

tial car buyers from going ahead with

purchases, resulting in the eighth

consecutive monthly decline in vehicle

sales.

The latest set of data deepens econom-

ic worries for the Congress-led UnitedProgressive Alliance government and

complicates the situation for the Re-

serve Bank of India (RBI), which is

walking a tightrope between needing

to stimulate economic growth while

curbing inflationary pressures and

shoring up the rupee.

The improvement seen in macroeconomic indicators in the past few months

seems to have stalled, said Samiran Chakraborty, head of India research at

Standard Chartered Plcs India unit.The trend reversal in most of the data is worrisome, he said, adding that

though inflationary pressures are expected to be a temporary phenomenon be-

cause of expectations of a good kharif crop, few greenshoots are visible on the

economic front.

Chakraborty said he does not expect any rate cut in the next monetary policy

review by RBI due on 30 July.


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As the rupee depreciated against the dollar, the central bank pressed the pause

button in its policy of monetary easing last month, leaving policy rates un-

changed after three cuts by 25 basis points each earlier in the year. A basis

point is one-hundredth of a percentage point.

The Indian currency has been the worst performer against the dollar since US

Federal Reserve chairman Ben Bernanke suggested in May that the US may

start a gradual withdrawal of monetary stimulus, starting in September,

should the worlds biggest economy stay on the expected course of recovery.

In June alone, the rupee tumbled 4.9%, making it the worst performer among

78 global currencies, according to Bloomberg data, as investors pulled money

out of Indian stocks and bonds. A falling rupee will also lead to higher com-

modity prices, which could throw the fiscal calculations of the government out

of the window.

The Indian economy has been struggling to accelerate after expanding 5% in

the year ended 31 March, the slowest pace in 10 years, as high borrowing costsintended to douse inflation hurt corporate investment and consumer spending,

and weak external demand curbed export growth.

The finance ministry expects growth to exceed 6% in the current fiscal year.

The International Monetary Fund (IMF) on Tuesday lowered Indias growth

forecast for 2013-14 to 5.6% from the 5.8% it projected in April, holding that

the risks of a longer downturn in emerging market economies had increased

because of domestic capacity constraints, slowing credit growth and weak ex-

ternal demand.

IMF cautioned that while old risks such as a protracted recession in the euroarea remain, new threats have emerged in the emerging markets because of the

anticipated unwinding of monetary policy stimulus by the US, which may lead

to sustained capital flow reversals.

Before jumping to any conclusion on the impact that emerging risks will have

on this years growth, the effect of higher government expenditure on public

consumption has to be factored in, said Kotak Mahindra Bank Ltd chief econ-

omist Indranil Pan, as a raft of state elections this year pave the way for a gen-

eral election in 2014

On Friday, chief economic adviser Raghuram Rajan held consultations with

foreign bankers on the possibility of selling overseas sovereign bonds to shoreup foreign exchange reserves to stabilize the rupee and contain the worsening

balance of payments situation.

They (have given) us a lot of suggestions, including sovereign bond issue. All

options are on the table and we will examine as and when the need comes, Ra-

jan told reporters.


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Finance minister P. Chidambaram and trade minister Anand Sharma are cur-

rently trying to woo investors in the US. The government has started a consul-

tation process to increase foreign direct investment caps across sectors includ-

ing telecom, multi-brand retail and media, to increase long-term capital in-

flows.

On Friday, some measure of relief was provided by a narrowing of the trade

deficit. In June, Indias trade deficit shrank to $12.2 billion from $17.8 billion a

month ago, as curbs put on gold imports by the central bank and the govern-

ment showed results. Gold imports dropped sharply to $2.5 billion in June

from $8.4 billion in May.

RBI may cut key policy rates 50-75 bps

this fiscal

The industry has been demanding a cut in key policy rate to boost economic

activities. Industrial output contracted by 1.6 per cent in May on poor show by

the manufacturing and mining sectors.

"We continue to believe that a flow of poor economic growth data and a general-

ly range-bound inflation trajectory over coming months will reopen space for

further monetary easing during the latter months of 2013," Barclays said in a

research note.

Bank of America Merrill Lynch said that in view of the sharp depreciation in

the domestic currency, interest rate cuts may be delayed and expect RBI to re-

tain 'pause' in July. At the mid-quarter review last month, it had kept key rates

unchanged.

The rupee has depreciated by more than 10 per cent in the last one month and

crossed the psychological level of 60/USD in June end.

"We think, slowing growth and falling CPI will help the RBI cut rates in the last

quarter of the year. We would still expect a 50-75 bps cut in rates by March,

2014," said BofA-ML.


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According to Barclays, for RBI, while its current focus is containing the rupee

weakness, on a more medium-term perspective, reviving growth in a non-

inflationary manner will remain a major concern.

"As such, we think monetary policy calibration will be biased towards further

easing, rather than tightening," it said.

The Reserve Bank is likely to cut the key policy rate by 50-75 basis points by

March 2014, say experts.

The high volatility in rupee and the upward pressures on inflation in June

have, however, considerably reduced the possibility of the RBI easing rates at

its first quarter monetary policy review on July 30.

The industry has been demanding a cut in key policy rate to boost economic

activities. Industrial output contracted by 1.6 per cent in May on poor show by

the manufacturing and mining sectors.


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RBI to maintain status quo on policyrates: Dun & Bradstreet

The Reserve Bank is likely to maintain a status quo on policy rates in its mone-

tary policy review later this month amid sharp depreciation in rupee and infla-

tionary pressure, says a report by global research firm Dun & Bradstreet.

According to the report, once the inflationary pressure abates and the rupee

stabilises, the Central Bank's focus may shift towards promoting growth by

easing policy rates.

"The domestic economy is at a crucial juncture with respect to the inflation

rate, exchange rate, industrial growth and the monetary policy," said Arun

Singh, Senior Economist, Dun & Bradstreet India.

Though a large number of factors like contraction in industrial growth, sub-

dued investment activity, lower trade deficit and continued weakness in auto-

mobile sales ideally warrant a rate cut by the RBI in its forthcoming policy

meet, the Central Bank may maintain a status quo, the report said.

"The vulnerability of the rupee and the rising upside risk on inflationary pres-

sure may prompt the RBI to go into the pause mode with respect to interest

rates in the near term," said Singh.

The RBI is scheduled to hold its first quarter monetary policy review on July

30. The industry has been demanding a cut in key policy rate to boost econom-

ic activities.

However, once the inflationary risk abates, RBI's focus may shift towards pro-

moting growth by easing policy rates, the report added.

In the near term, strong depreciation of rupee along with rising global crude oil

prices is likely to keep inflation from moderating. D&B expects the WPI infla-tion to remain in the range of 4.7-4.9 per cent during July 2013.

However, a favourable start to the monsoon season can keep a check on food

prices and help the policymakers in fighting the headline inflation going for-

ward, it added.


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RBI could reverse gear if rupee recovers:Prime Minister Manmohan Singh

Prime Minister Manmohan Singh on Friday said that the Reserve Bank of In-

dia's move to raise short-term interest rates is only aimed at containing specu-

lative pressure on the rupee, sending a strong signal that the government ex-

pects the central bank to resume monetary easing once the currency stabilises.

Singh promised more measures, including further liberalisation of the foreign

direct investment regime and steps to boost investment, to ensure a pickup

from the decade-low 5% growth last year, but admitted that in the current

year, expansion would be less than the

6.5% estimated in the budget.

"These steps are not meant to signal an

increase in the long-term interest rates.They are designed to contain specula-

tive pressure on the currency. Once

these short-term pressures have been

contained, as I expect they will be, the

Reserve Bank can even consider re-

versing these pressures," Singh said at

an Assocham function.

RBI announced a series of measures on

Monday, including raising the cost ofborrowing under the marginal standing

facility (MSF) by 200 basis points and narrowing the window for banks wishing

to borrow short-term funds from the central bank. These measures, amounting

to monetary tightening, are intended to make Indian debt securities more at-

tractive to foreign portfolio investors who have been pulling out money.

Macroeconomic Fundamentals Sound

The over 8% decline in the Indian currency since May has forced a pause in

monetary easing despite wholesale inflation having come down below RBI's

comfort level of 5%. Singh said the country's medium-term macroeconomicfundamentals remained sound and healthy. He hoped that current account

deficit (CAD), which touched a high of 4.8% of GDP in 2012-13, would be lower

in the current fiscal and the government will use all policy instruments availa-

blefiscal, monetary and supply-side interventionsto ensure that CAD de-

clines further over time.


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Looking to boost investor sentiments and eyeing the much-needed flows to fi-

nance CAD, Singh said the government would further relax FDI norms close on

the heels of Tuesday's decision to raise FDI caps on sectors such as telecom,

and defence on a case-by-case basis. Singh asked industry to shed desponden-

cy and expressed hope that the impact of the reforms would boost economic

growth in the second half of this year.

"Looking at the medium-term prospects, I feel we can and we should remain

optimistic. The basic fundamentals of our economy are sound and healthy. We

have been taking all possible measures to correct imbalances on the macro

front... I assure you we will leave no stone unturned to ensure that our econo-

my rebounds. I appeal to each one of you not to be overcome by negative sen-

timents," he said. Industry, however, wants a more holistic plan of action from

the government to get the economy back on track.

"Whatever the government has done so far, including the recently announced

FDI reforms, has been too little and come really late. Industry is awaiting real

decisive action from the government, which can give an immediate push to the

pharmaceutical sector and help bring the economy back on the track," Swati

Piramal, vice-chairperson of Piramal Enterprises, said.

"The major steps that the government intends to take in the future will only

show results in not less than 18 months, and therefore, we feel that at the cur-

rent pace, it will be difficult to touch even 5% growth in 2013-14," said SajjanJindal, chairman and managing director of JSW Steel. The prime minister also

hit back at political critics, citing statistics to drive home his point on the gov-

ernment's performance.

"Let me address the issue of the UPA government's performance. Our political

critics focus on the experience of one bad year. This makes for good television

but it is a very distorted picture," he said. He pointed out that the annual aver-

age growth in the eight years of UPA from 2004-05 to 2012-13 was 8.2%, much

better than the 5.7% reached in the previous eight years under NDA.

The percentage of population below poverty line declined 0.7% per year before

UPA came to power, he said, adding, "it has fallen more than 2 percentage

points per year between 2004-05 and 2011-12". "I think this is a record that

any government can be proud of. I agree we have had one bad year. I assure

you we will get out of it," Singh said.


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rbi monetary policy may 2013-2014

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