A weak rupee, high consumer price inflation, and slow growth may see the Reserve Bank of India keeping key rates on hold at the first quarter review of its Annual Policy 2013-2014 on Tuesday.
In the macroeconomic and monetary developments document, released on Monday, the central bank emphasised that the monetary policy priority now is to restore stability in the currency market so that economic conditions remain supportive for growth. With short-term interest rates already firming up after the RBI’s liquidity draining measures kicked in, the central bank is unlikely to take any rate action.
Tread cautiously
The central bank said it will tread the monetary policy path cautiously in the backdrop of slow economic recovery, high consumer price inflation and the risk of continued hardening interest rates in advanced economies that could disrupt capital inflows.
The RBI termed its recent efforts to curb volatility in the exchange rate as, at best, providing ‘some breathing time’.
The central bank said it is important to push through structural reforms to inspire the trust and confidence of both domestic and foreign investors so that savings and investments are stepped up and the current account deficit (CAD) is reduced.
The RBI cautioned that the CAD, which moderated to 3.8 per cent of GDP in the January-March quarter against a high of 6.5 per cent in the immediate preceding quarter, may have widened again in the April-June quarter. Analysts say a widening CAD will weaken the rupee further.
CAD arises when a country’s total import of goods, services and transfers is greater than its exports.
Pointing out that tax collection has remained weak so far this fiscal, the RBI said if revenues fall short of the Budget estimates due to the slowdown, a cutback in expenditure will be required. Therefore, it is important to restrain subsidy commitments and increase public investments to attract private investments.
The central bank warned that political uncertainties could rise as part of the electoral cycle and this could affect the macro-economy through different channels.