Main focus is on curtailing rupee volatility: Subbarao

A day after the first quarter review of the monetary policy 2013/14, the Reserve Bank of India Governor D Subbarao explained his reasons for leaving the key interest rates unchanged. In his customary meet with researchers and analysts following the announcement, he said the central bank was focused on curtailing the volatility in the exchange rate. "We believe that the volatility is detrimental to our growth prospect and also to stability prospects," he said.

But despite the RBI maintaining the status quo, the rupee continued to slide. The rupee, which was in the range of 59.90 against the US dollar, plunged to 60.47 by the end of Tuesday when the policy was announced. On Wednesday, it crashed to 61.20 in early trades.

Speculators are probably playing on the vulnerability of the rupee because of the high current account deficit with no sign of encouraging dollar inflows.  Clarifying the RBI guidance on the possible rollback of earlier measures taken to hike short term rates,  Subbarao said, "It is difficult to attach a time frame. The rollback will happen in a calibrated manner and only after stability is restored in the foreign exchange market."

Himanshu Yadav of Bajaj Allianz asked which would be the best option to choose between NRI bonds, sovereign bond or a credit line from the International Monetary Fund to bring back dollar inflows. Subbarao has already made his reservation about having a sovereign bond issue known.  "All possibilities are on the table. A sovereign bond issue is the least preferred option as per our view," said Subbarao.

Kaushik Das of Deutsche Bank asked about the declining import cover  and the rising short term external debt. Urjit Patel, Deputy Governor of RBI, answered that the reserve position of six and a half to seven months import cover was enough. "The short term debt has been refinanced in the last three years (without any problems)," said Patel.

Kumar Rajapuri of ANZ Bank asked whether the high interest would help to reduce the import demand at a time when growth has also fallen considerably.  "Our interest rate affects the import demand and also impacts the non discretionary component of import demand," said Subbarao.

Sudhir Agrawal of UTI Mutual Fund asked if a repo rate hike would be one of the future options if the foreign exchange market failed to stabilise. Without commenting on any particular policy instrument, Subbarao said, "There is lot of arsenal with the RBI (which can be used) as necessary and warranted by the situation."    

Srinivas Varadarajan of Mount Nathan Advisors asked about using the Consumer Price Index as a tool for gauging inflation to determine interest rates. "The new CPI index doesn't have a long enough history for us to depend entirely on it. But we analyse and look at all the indicators," said Subbarao.