Says RBI’s currency intervention seems to have achieved intended purpose.
Interest rates in India appear to have peaked, but rate cuts in the near-term would depend on the level of inflation, Subir Gokarn, deputy governor at the Reserve Bank of India (RBI), said on Thursday.
India’s headline inflation has stayed stubbornly high for almost two years, prompting the central bank to increase policy rates 13 times since March 2010. However, recent data suggest inflation has started to moderate, with the food price index dropping for the first time in six years in December, 2011.
“We are basically saying the cycle has peaked. I don’t think in any of the governor’s statements or in our guidance, we have made any explicit mention of actually starting to bring rates down. That will depend on how inflation momentum is playing out,” Gokarn said.
He was speaking to news channels after a conference in Singapore.
The central bank refrained from increasing interest rates in its mid-quarter policy review on December 16, as the high rates seem to have slowed business activity and growth of the domestic economy. RBI’s third quarter review of annual monetary policy is scheduled on January 24.
Gokarn said the slowing growth of the economy would help bring down inflation by the end of the current financial year. Headline inflation remained over nine per cent in November. RBI expects it to fall to seven per cent by the end of March.
“We have emphasised the fact that growth momentum is moderating and we expect that will translate into lower inflation momentum,” Gokarn said.
Once reversal in the rate cycle starts, the central bank may use instruments such as the cash reserve ratio (CRR) to improve liquidity. “But till we arrive at that point, the (open market) operation provides that sort of a tactical instrument by which we can infuse liquidity to ease pressure in the money markets, without necessarily signaling a very explicit change in the monetary policy stance,” Gokarn said.
Since November, RBI has purchased around Rs 41,000 crore government bonds through open market operations to infuse liquidity in the system and support the government borrowing programme.
Gokarn reiterated RBI’s intervention in the foreign exchange market was basically aimed to reduce volatility in the currency exchange rate adding that the central bank would not allow speculative trades to decide the direction of rupee.
“We do it from the viewpoint of smoothing, from the viewpoint of reducing the volatility...But having said that, we clearly have no intent to let the currency be driven by motivations or by forces other than fundamental demand-supply,” Gokarn said.
In 2011, the rupee depreciated by 16 per cent against the dollar. Gokarn said the recent steps taken by RBI to curb volatility appear to have had its desired impact.
"For the moment, if you look at the dynamics of the rupee over the last few weeks, it appears to have reached some sort of stable zone," the deputy governor said. The Indian currency on Thursday closed at Rs 52.98 a $1.