RBI says restoring rupee stability is its key policy goal

A view of the facade of the Reserve Bank of India (RBI) head office in Mumbai. India’s struggling economy is crying out for interest rate cuts to spur growth but with the rupee on the ropes monetary easing is out of question at the central bank meeting today, analysts say.

Bloomberg/Mumbai/New Delhi

The Reserve Bank of India said steadying the rupee to help preserve economic stability has become the priority for monetary policy and that more steps are needed to curb the nation’s current-account deficit.

“The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth,” the Reserve Bank said in an economic review before today’s rate decision in Mumbai. Such a strategy will work only if reinforced by “structural reforms” to reduce the deficit and spur investment, it said.

Governor Duvvuri Subbarao raised two interest rates in July, restricted daily fund injections into the banking system and tightened lenders’ reserve ratios, curbing rupee supply to stem the currency’s plunge. All except one of 32 analysts in a Bloomberg News survey predict he will keep the benchmark repurchase rate at 7.25%, in the last scheduled monetary-policy review due before his term ends in September.

“The RBI’s focus has shifted to curbing rupee volatility,” said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai. The recent steps taken by the central bank may hurt growth if they stay in place for an extended period, she said.

The central bank’s measures have contributed to an appreciation of about 3% in the rupee versus the dollar since the currency touched a record low July 8.

It weakened 0.6% to 59.4175 at the close in Mumbai yesterday. The yield on the 7.16% government bond due May 2023 fell to 8.13% from 8.16% on July 26. The S&P BSE Sensex index closed down 0.8%.

The rupee, which has depreciated about 10% in the past six months, has been hurt by India’s record current-account shortfall. The prospect of reduced US monetary stimulus, which has spurred capital outflows in emerging markets from Indonesia to Brazil, has also weighed on the currency.

“Policy initiatives were taken in mid-July to address exchange rate volatility so that it does not risk macroeconomic stability and growth sustainability,” the Reserve Bank said.

The recent “liquidity tightening measures” provide “at best some breathing time,” it said.

The most important global risk is that “at some stage, exit from accommodative monetary policy in the US may tighten global liquidity,” with implications for capital flows to nations including India, the Reserve Bank said.

India’s economy will expand 5.7% in the fiscal year through March 2014, based on a survey of forecasts from other organizations, yesterday’s report showed. The previous survey in May projected 6%.

Wholesale-price inflation will average 5.3%, the survey said, compared with an earlier 6.5% estimate.

Currency depreciation and rising fuel costs are among upside price pressures, the monetary authority said.

Subbarao on July 15 increased the marginal standing facility rate and the bank rate by 200 basis points to 10.25%. That contrasts with 25 basis-point repurchase rate cuts in January, March and May each to spur growth.

Gross domestic product growth slowed to a decade-low 5% in 2012-2013. Wholesale-price inflation in Asia’s third- largest economy accelerated to 4.86% in June. Consumer- price gains quickened to 9.87%.

The recovery in economic expansion may take time and is expected to take “shape slowly as the year progresses,” the central bank said in the report, adding “sustainable recovery requires control over consumer price inflation.”

The current-account deficit may have widened in April through June, it said. The gap is likely to remain above the sustainable level of 2.5% of GDP, the central bank said.

The government since September last year has eased restrictions on foreign-direct investment in industries such as aviation and retail, seeking to woo more stable inflows to help finance the imbalance.

Meanwhile, Indian stocks dropped for a fourth day, the longest losing run in two months.

State Bank of India fell to its lowest close in 18 months. Hindustan Unilever had its biggest loss in six months after the stock was reduced by Macquarie Group and JPMorgan Chase & Co. Software exporter Wipro surged the most in four years after forecasting record sales.

The S&P BSE Sensex lost 0.8% to 19,593.28 at the close in Mumbai. The gauge fell 2% last week as the RBI raised two interest rates, curbed lenders’ access to funds and limited trades in currency derivatives to steady the rupee. Chaudhuri’s views contradicts 31 of 32 analysts in a Bloomberg survey who predict no change to the benchmark rate, while 29 of 30 expect the reserve ratio to remain unchanged at 4%.

“Investors are concerned that the RBI commentary might be hawkish,” Supreeth S M, the chief executive officer at Quant First Asset Advisors India, said by telephone from Bangalore. “There’s concern the central bank may signal a reversal in the interest-rate easing cycle.”

The central bank’s decision is due at 11am.

Hindustan Unilever slumped 3.8% to Rs638.55, the sharpest drop since January 23. Earnings may grow at a slower pace amid slowing sales and narrowing profit margins, JPMorgan said in a report on Sunday. Muted growth in the company’s personal-care products business is a disappointment, Macquarie said in a report yesterday.

Cigarette maker ITC decreased 2.8% to Rs357.95. Hindustan Unilever and ITC have a combined 16% weighting in the Sensex, data compiled by Bloomberg show.

State Bank fell 1.4% to Rs1,740.05, the lowest close since January 11, 2012. HDFC Bank, the largest lender by market value, slid 1.8% to Rs632.5, a fourth day of declines. The CNX Bank Index lost 1.3% to 10,331.

Wipro surged 6.8% to Rs408.05, the most since July 2009.

The CNX Nifty Index on the National Stock Exchange fell 0.9% to 5,831.65. India VIX, which gauges the cost of protection against losses in the Nifty, advanced 8.8%.