MUMBAI: Reiterating that the Reserve Bank has “no official level for the rupee”, governor Sanjay Malhotra has said “the over 5 percent year-to-date plunge of the currency is not a worry” and that the unit is likely to trade around the present levels through the reminder of the current fiscal. The RBI-led rate-setting panel MPC, after the customary three-day meeting that ended on Friday, unanimously voted to reduce the policy repo rate by 25 bps to 5.25 percent -- the fourth reduction since Malhotra took over last December 10, and taking the cumulative rate cuts to 125 bps from 6.5 percent when he took over.
The central bank has also lowered its inflation forecast for the full year to a low 2 percent down from 2.6 percent in the past policy and increased the growth forecast by 50 bps to 7.3 percent. Clarifying that the central bank does not target any specific rupee level, but the market does, Malhotra said RBI's role is to reduce abnormal volatility.
“We don't target any price levels or any bands. We allow the markets to determine the prices. We believe that markets, especially in the long-run, are very efficient. It's a very deep market,” Malhotra said at the post-monetary policy press conference when asked about the rupee’s depreciation.
He said fluctuations keep taking place in the forex market and the RBI’s effort is limited to reducing “abnormal or excessive volatility”. The comment came as the RBI announced three-year dollar-rupee buy-sell swaps of $5 billion this month and the rupee has breached the 90 mark twice this week plumbing to 90.49 yesterday. When asked specifically whether the downward revision in the retail inflation forecast factors in the steep rupee fall and if the the present level is what is the real value of the rupee, Malhotra answered in the affirmative.
“Yes the 2 percent retail inflation forecast for the current fiscal is after taking into account the likely impact of the rupee fall in imported inflation. Typcially, a 5 percent rupee depreciation will lead to a 35 bps upside on inflation and a 25 bps downside on growth,” the governor said. Whether this means that RBI sees the present rupee level of the 90s, though Malhotra did not say so in as many words.
The 25 bps rate cut review comes on the back of a blowout economic performance, with gross domestic product clipping at a six-quarter high of 8.2 percent in Q2 and consumer price index inflation easing to an all-time low of 0.25 percent in October. It also comes amidst the rupee plunge which has plummeted to 90.49 on Thursday forcing many to caution against a rate cut today.
Penciling in a higher economic growth this fiscal, the MPC has pegged growth printing at 7.3 percent from the earlier outlook of 6.8 percent with Q3 coming in at 7 percent and Q4 at 6.4 percent and Q1 and Q2 next fiscal coming in at 6.7 percent and 6.8 percent respectively. On the inflation side, he has further revised downwards the forecast for the full fiscal to 2 percent down from 2.6 percent in the previous policy, with Q3 and Q4 printing in at 0.46 percent and 0.9 percent respectively, while sharply rising in the first two quarters of the next fiscal to 3.9 percent and 4 percent respectively.
Asked if the $5-billion dollar swap is designed to curb the rupee slide, Malhotra said, “it is purely a liquidity measure. It is not to support the rupee,” reiterating that the central bank does not target any level for the currency and allows it to find its “correct position, correct level”.His optimism comes the high foreign exchange reserves of $686 billion as of November 28, providing over 11 months of import cover and “very manageable current account as the strong fundamentals should support better capital inflows ahead.
He also said given the berry benign inflation, which though is not the ideal rate, as the targeted comfort level is 4 percent, and the not so robust revival in the consumption story, our door is open for more easing.
“Inflation below threshold leaves room for more monetary easing,” he the RBI said, as it took steps to boost banking-sector liquidity by up to $16 billion to support a "goldilocks" economy. “Our economy is in a "rare goldilocks" period, Malhotra said, adding that since October, the economy has experienced rapid disinflation leading to a breach of the central bank's lower threshold of tolerance. Given these macroeconomic conditions, "policy space" exists to support growth, he said, adding later at a post-policy press conference: "We expect the policy rates to be low as inflation stays benign as the underlying inflation pressures are even lower. Both demand and supply-side factors are driving the low inflation."