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RBI to manage liquidity as rupee stability trumps growth

Source : REUTERS
Last Updated: Mon, Jul 29, 2013 11:41 hrs
The Reserve Bank of India logo is pictured outside its head office in Mumbai

The Reserve Bank of India, which has taken a series of measures to support the battered rupee, said on Monday it will continue to manage money market liquidity in order to balance financial stability, growth and inflation.

The central bank's policy focus has shifted from reviving economic growth to defending a rupee that hit a record low of 61.21 to the dollar on July 8, when it was down more than 9 percent since the start of the year.

"Global currency market movements in June-July 2013 have prompted a re-calibration of monetary policy," the central bank said in its a macroeconomic report, a day before it is expected to leave interest rates unchanged at its monetary policy review.

"The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth," it said.

The RBI has squeezed liquidity from the money market and pushed up short-term interest rates in order to deter capital outflows, allowing the rupee to make a slight recovery, and by late Monday it was trading around 59.40 to the dollar.

"The Reserve Bank will endeavour to actively manage liquidity to reinforce monetary transmission that is consistent with the growth-inflation balance and macro-financial stability," it said.

The RBI last cut its policy repo rate by 25 basis points to 7.25 percent in May and it left the rate on hold at its last review, in June.

The RBI reiterated its call for the government to implement measures to attract stable capital flows, saying that recent central bank steps to stem volatility in the rupee "provide at best some breathing time."

In Monday's report, the RBI's survey of professional forecasters lowered its growth forecast for the fiscal year that started in April to 5.7 percent from 6.0 percent in its previous survey.

The survey also foresaw a current account deficit of 4.4 percent of gross domestic product for the current fiscal year, compared with a deficit of around $88 billion, or a record 4.8 percent of GDP, in the last fiscal year.

The survey projected wholesale price index inflation at 5.3 percent during the current fiscal year, lower than the 6.5 percent forecast in its last survey.

India's headline wholesale price inflation picked up for the first time in four months in June to 4.86 percent annually, while the consumer price index also remained elevated at 9.87 percent, a key worry for the central bank.


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