Presenting his 20th monetary policy statement, which is his last as well, Governor Duvuuri Subbarao again disappointed everyone as he left all the key rates unchanged. Defending the measures unleashed to tame the rupee over the past fortnight and keeping the policy rates unchanged with the same objective, Subbarao Tuesday stoutly denied the charge that the pre-policy measures were a panicky reaction saying they were the result of clear thinking and refused set a time-line to reverse them. “The RBI is sensitive to the short-term costs of these tight liquidity measures on economic activity. We are as anxious as anyone else to roll these back. But getting locked into a time frame is both not feasible and inadvisable, as we ourselves do not know for sure when the external situation improves,” Subbarao said at the customary post-policy meeting at his Mint Road headquarters.
Subbarao, who will be demitting office on September 4 after a tumultuous five-year tenure called for urgent measures from the government to contain current account gap which is the main reason for the battered state of the rupee, which lost close to 12 percent since April 1. “I don’t agree with the charges of being divergent in our stance and panicky. We don’t want to get locked into a timeframe on how long these measures might be necessary. I admit that there will be consequences for this. There will be pain in the economy, somebody will have to pay a cost for this, those costs are inevitable and unavoidable,” he said. He further said putting a timeline may create more confusion than throw light “as the rollback of these measures are state-contingent and data-dependent and is linked to the decline in volatility and disorderly movements in the exchange rate,” which are not fully under the RBI control.
Delineating the rationale for the July 15 & 23 measures, the Governor said, “forex intervention is a standard tool for defending against volatility. As much as we resorted to that instrument, we were also conscious that we should not fuel speculation or help speculators. The first line of defence against excessive exchange rate volatility is monetary policy instruments and that is what we did.” He further said, “we were not altering the fundamental path of the exchange rate, our action was informed entirely by the need to curb volatility and disorderly movement. Why he did not touch the key policy tools of repo and CRR, the Governor said, “we did not touch the repo rate or CRR and we determined that tightening liquidity by the measures we adopted by adjusting the LAF and raising the MSF rate and some OMOs was the best prescription for containing rupee volatility. “The idea was to make liquidity scarcer and more costly so we determined modulating access to LAF would be the most efficient way of controlling volatility and we determined that if we do this, it can be calibrated more flexibly rather than resorting to CRR or repo because there are other implications attached to those measures,” he said. “We were conscious that we were doing it abruptly. We were conscious that we were doing it in the middle of a reporting fortnight. We wanted to leverage on the announcement impact,” he said.
Stating that these actions were well-thought out and not panicky-reaction as is being made out by the markets, the Governor said, “we did not use the word 'temporary' (in the policy document as well as in the macroeconomic review but used ‘temporary breather), because it would mean different things to different people and you would pressurise us to define what temporary is and we are not in a position to define what temporary is.” Explaining further the conducive conditions for coming back to easy money policy regime, the Governor said some of the indicators RBI ill look at will be the the bid asked spread, the intra-day volatility in the exchange rates, forward contracts to evaluate importers' assessment, volumes and open interest positions in the futures market, the options pricing, the forward premia. “We are going to look at a number of factors to determine if volatility in exchange rates has been contained. We will also make an assessment of global financial markets,” before arriving at a decision on rollback.
To a question on what are the more possible measures on the anvil if these measures do not work out in the desired way (as has been evident today as the rupee lost much more than what it has gained since July 15), Subbarao said, “be assured that there is enough arsenal with the RBI to contain volatility in the exchange rate,” but refused details. Explaining the rationale behind the recent measures, the Governor said unsustainably high CAD in the past three years along with flight of foreign capital has led to the rupee depreciated of late as financing it becomes difficuty now. “Because of the large CAD and the way we financed it, we became vulnerable to the external outlook, global financial markets and the sudden stop and reversal of capital flows and the consequent destablisation of the exchange rate,” he said, adding “the rupee dropped from 57 to 61 in a matter of four weeks without any change in our fundamentals.”
This rapid depreciation of the currency put us in a vicious spiral and amplifying the uni-directional movements and encouraging the herding instinct, he said. At the same time, on the domestic front, there was ample liquidity in the system. For instance on July 5, the LAF went into a reverse repo mode briefly (6.25 percent). “The easy liquidity provided for a fertile ground for speculation on the exchange rate which exacerbated vulnerability.”
The Governor also reiterated that RBI does not have a rupee target and termed the market speculation on this as “completely misinformed.” “We are not defending any exchange rate target and not altering the movement of the exchange rates according to the fundamentals. The rupee depreciated from 47.4 in 2009-10 to 54.95 in 2012-13 and we did not stand in the way of rupee finding that level accept to manage volatility.” If the rupee is adjusting gradually, that’s the way it should be. But I want to say that we remain committed to curbing volatility in the exchange rate. As far as the broader monetary stance is concerned, there would have been a reasonable argument for further easing because growth has moderated more than we thought. The governor also said the measures so far yielded positive results as volatility has come down since July 15 as the rupee climbed to 58 for a short while.
Deputy governor inicharge monetary policy Urijit Patel said, “we believe that we have achieved some success as the intra-day volatility has declined from 90 paise on July 9 to an average of about 48 paisa post July 16.
