Recent liquidity steps 'at best' breathing time: RBI

The central bank which recently tightened liquidity has also advocated for structural reforms

The Reserve Bank of India (RBI) has sounded a hawkish note on the eve of the monetary policy review by saying the recent currency depreciation has posed upside risked to both wholesale and consumer price inflation.

In the Macroeconomic and Monetary Development report released today the central bank said it will actively manage liquidity to reinforce monetary transmission that is consistent with growth-inflation balance.

“Recent currency depreciation and upward revisions in fuel prices have increased upside risks to both wholesale and consumer price inflation,” the report said.

Following the sharp depreciation of the rupee, the central bank has tightening liquidity to make  the rupee expensive. While the steps has shown results as the currency has not seen sharp depreciation, but the central bank has not indicated till when the steps will be continued.

In fact, RBI has reminded that these liquidity measures can provide temporary relief but the country needs to push for structural reforms for addressing high current account deficit.



“Recent liquidity tightening measures taken by the Reserve Bank to curb volatility in the exchange rate provide, at best, some breathing time. This strategy will succeed if reinforced by structural reforms to reduce the current account deficit (CAD) and step up savings and investment,” RBI said.

In the last financial year CAD hit a record high at 4.8% of GDP – much higher than the central bank’s comfort zone of 2.5%. Higher CAD has out the pressure on rupee which has depreciated about 9% since April.

 

The central bank will announce its first quarter review tomorrow in which it is widely believe to maintain status quo though the tone is expected to be hawkish. After cutting repo rate by 75 bps in 2013, RBI decided to hold rate in the last policy meeting.