‘Global fears, easing prices to impact RBI stance’

‘Global fears, easing prices to impact RBI stance’

Hyderabad: A softening trend in world commodity prices and emergence of global recession concerns could have an impact on the Indian central bank’s policy stance, a deputy governor said on Friday.

“Fears of global recession have just re-emerged. I suspect that when we next meet in September, it will be an issue," Subir Gokarn, who handles monetary policy at the central bank, told reporters on the sidelines of an event in the southern city of Hyderabad.

“So far there have been concerns about the extent of the recovery not being strong. Second recession was not in realm of probability till very recently," he said, referring to fears about the US economy.

His comments followed a massive sell-off across world stock markets on renewed concerns over the global economic health and heavy demand for safe-haven government securities.

The 30-share BSE index tumbled more than 3% on Friday morning to a near 14-month low and the rupee slumped to a 5-week low at 44.8550 per dollar, joining a slide across Asian markets.

The benchmark overnight indexed five-year swap rate slid to a more than 8-month low and the 10-year benchmark federal bond yield fell to a near two-week low of 8.29%.

The Reserve Bank of India (RBI), which raised rates by a steeper-than-expected 50 basis points last week, has been one of the world’s most aggressive central banks to fight high inflation by tightening policy.

It has raised rates 11 times since mid-March 2010 and bond traders had been pricing in another increase in September.

Gokarn said the RBI takes into account demand pressures and commodity prices for formulating its policy stance.

“We saw some softening of commodity prices in May-June but that trend did not persist and by the time we started July (policy) process they had stabilised," he said.

“Now, if this is a beginning of softening trend, it will have some impact on our thinking in terms of our stance," he added.

US crude fell below $83 on Friday, heading for its biggest weekly drop since early May. Brent has dropped nearly 11% and US oil by about 12% this week.

Foreign exchange dealers were expecting the RBI to step in and arrest a sharp fall in the rupee, but Gokarn said that an intervention could tighten liquidity in a banking system which is already running a negative cash condition.

“There is no policy position in terms of intervening to prevent movement of rupee. The concern will be with liquidity. We don’t want market to be disrupted by constraints of liquidity," Gokarn said.

At a separate event, another deputy governor of the RBI, K.C. Chakrabarty, said while it is not easy to move away from investing in US Treasury, the central bank is attempting to diversify its foreign exchange reserves to prevent any devaluation of its dollar assets.