RBI hints at status quo, will focus on stabilising rupee

Hinting at status quo on policy rates, the RBI today said its immediate focus is to stabilise rupee and made a case for calibrated action to contain the current account deficit, which is a major reason for the steep fall in currency.

'The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth. (However) this strategy will succeed only if reinforced by structural reforms to reduce the CAD and step up savings and investment,' RBI said in its macroeconomic and monetary developments review released on the eve of the policy announcement.

'Amplifying macro-financial risks warrant cautious monetary policy stance,' it added.

A survey of external professional forecasters done by Reserve Bank increased its median expectation on rupee value to the 59.5 level to the dollar by March 2014 - nearly the same level at which the domestic currency is now trading. This is compared to the earlier expectation of 54.

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 gives in the quarterly policy announcement, which would be the last before he demits office early September.

The depreciation in the rupee, which has shed over 10% this fiscal, will weigh heavy on RBI, they said, adding that this is a shift from the central bank's focus on bringing down inflation and propping up economic growth.

'While monetary policy is largely guided by the growth-inflation dynamics, it is also tempered by considerations of risks of external imbalances,' the report said.