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RBI to keep calibrated pace of policy exit

RBI to keep calibrated pace of policy exit
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First Published: Fri, Jun 18 2010. 04 34 PM IST
Updated: Fri, Jun 18 2010. 04 34 PM IST
Hyderabad: India’s central bank will exit from its loose policy at a “calibrated” pace, the governor said on 18 June, pushing down bond yields on some doubts of any early interest rate rise.
A slew of sometimes contradictory statements on inflation from top officials had kept the market jittery this week about whether the central bank would raise rate before the 27 July review, a move which the market has priced in.
Pressure has been mounting on the Reserve Bank of India to raise rates ahead of the July review after the wholesale price index rose 10.16% in may, the highest level in the G20 group of leading economies.
“Yes, that remains our stance that we must do a calibrated exit from the expansionary stance that had been taken during the crisis,” RBI governor Duvvuri Subbarao told reporters in the southern Indian city.
The benchmark 10-year bond yield dipped 3 basis points after the comments, as did the one-year swap rate, though traders said Rs110-billion debt sale and persistent concerns about inflation prevented a further fall.
“Altogether the statements were comforting but inflation concerns are keeping yields from falling further,” said S. Srikumar, manager of fixed income at Corporation Bank.
Most analysts expect tight liquidity would keep the RBI would refrain from raising rates at least till early July.
Subbarao acknowledged that supply-side inflation was spreading and demand-side pressures were building up.
He said the RBI is watching growth, inflation as well as the situation in Europe and the domestic liquidity situation.
“The effective rate has moved up from the reverse repo rate which is at 3.75% to the repo rate which is at 5.25%. So there has been some automatic tightening which has taken place,” Subbarao said.
Subbarao said the RBI would revisit its end-March 2011 forecast of 5.5% in its 27 July review after the March wholesale inflation rate was revised up to 11.04%, well above its estimate.
LIQUIDITY CONSTRAINTS
Liquidity has been tight after outflows of about Rs1.36 trillion ($29.5 billion) from the banking system for payments for 3G mobile spectrum and broadband auctions and advance taxes, pushing up cash rates.
The repo rate, at which the RBI lends to commercial banks, will stay the operative rate for the next few weeks and “beyond that it will depend on how the liquidity situation will evolve and action, if any, the RBI might take,” Subbarao said.
The RBI will buy back Rs100 billion of bonds to help ease the cash squeeze, part of an up-to-200 billion repurchase plan, a move Subbarao said was a temporary measure to address what is seen as a temporary constraint.
He added that the liquidity situation has become more comfortable, but traders said a clear picture will be available only when local banks report their latest cash holdings on 18 June and start borrowing for fresh requirements for the coming two-week period on 19 June.
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First Published: Fri, Jun 18 2010. 04 34 PM IST