RBI decision influenced by external factors: Rangarajan

Reserve Bank's decision to maintain a status quo on interest rates has been influenced by external sector considerations, specially widening current account deficit, Chairman of Prime Minister's Economic Advisory Council, C Rangarajan, said.

"Yes, I think it is a difficult choice. The RBI has taken a cautious stand. . .the decision has been largely influenced by the external sector consideration.

“The current account deficit is high and more recently the rupee has been under pressure.

“This appears to have been a major factor influencing the RBI to pass this stand," Rangarajan said post-RBI policy announcement.

The Reserve Bank in its first mid-quarter policy review on Monday kept the key interest rates unchanged because of elevated food inflation, rupee depreciation and uncertainty over foreign fund inflows.

He said going forward the price situation seems to be continuing and there have been some administered prices that needs revision.

"But even the depreciation of the rupee will have some impact on the price situation," he added.

Rupee had hit an all-time low of 58.96 per US dollar last week on concerns the US Federal Reserve might pull back its quantitative easing programme in a phased manner.

Rangarajan said the developments on the external situation in the coming six weeks will determine RBI's next policy review on July 30.

"If the capital flows are resumed and if the rupee is not under the kind of pressure it has been in the last few weeks, the RBI would have an increased space to operate.

"I personally think that the external sector considerations will again be the predominant one even by the end of July," he said.

The CAD, which is the difference between the outflow and inflow of foreign currency, is estimated to be around 5 per cent of the GDP in 2012-13 fiscal.

The CAD had touched a record high of 6.7 per cent in the October-December quarter. Chief Economist Bank of Baroda Rupa Rege Nitsure said the RBI may ease the policy in second half of 2013-14 conditional upon normalcy in monsoon and stability in currency.

"I see no scope for policy easing in HF1, FY14 on the back of inflationary implications of currency depreciation, adjustment in administered prices and persistence of food imbalances," she said.

Supporting the policy move, Siddharth Shankar, Advisor, KASSA said the RBI has done the right thing by not making changes in rates at this point of time.

He said the bank may like to watch the quantitative easing action by the US.

"Should the rupee remain volatile and Fed starts to pull out of QE3, we would see rupee depreciating further thereby putting more pressure on inflation and thus RBI may not cut rates (even) in the next meeting," Shankar said.

Meanwhile, Rangarajan said food inflation still remains high but with monsoon progressing, the expectations are that food prices might come down.

". . .But at the same time, as I have said earlier, the major factor influencing the RBI in its decision will be what happens on the external front," Rangarajan added.

Image: C Rangarajan