Mumbai: Weighed down by a weak rupee, the Reserve Bank on Tuesday chose to keep all key interest rates unchanged and asked the government to take urgent steps to reign in the high current account deficit.
As expected, the Reserve Bank of India left its policy repo rate at 7.25 per cent but took a dovish tone as it cut its growth forecast for Asia's third-largest economy to 5.5 per cent for the fiscal year, from 5.7 per cent previously. It held the cash reserve ratio at 4 per cent. The RBI said recent liquidity tightening steps "will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation."
The last policy statement of RBI Governor Duvvuri Subbarao's five-year tenure, unless it is extended, continued to call on the government to take urgent steps to bring down the current account deficit, which hit a record 4.8 per cent of GDP in the last fiscal year. The current account gap makes India especially vulnerable as global investors move away from emerging markets in anticipation of a winding down of loose U.S. monetary policy. Turkey, Brazil and Indonesia have all raised rates to counter capital outflows.
Indian policymakers will be hoping the U.S. Federal Reserve doesn't spark a fresh surge in flows away from emerging markets when it holds its policy review this week. "It should be emphasised that the time available now should be used with alacrity to institute structural measures to bring the CAD down to sustainable levels," Subbarao said. However, New Delhi has struggled to implement steps to attract foreign corporate investment, and with elections due by May, Prime Minister Manmohan Singh's weak coalition government has limited room for pushing through further reforms.
The rupee fell to a record low 61.21 to the dollar on July 8, when it was down about 10 per cent since the start of 2013. While India has succeeded in stabilising the rupee, which ended on Monday at 59.42, the surge in short-term interest rates has squeezed funding for corporate borrowers and prompted many economists to cut their growth forecasts.
The benchmark S&P BSE Sensex opened higher and remained flat soon after the unveiling of the policy, which was along expected lines.