The Reserve Bank of
India (RBI) has today kept its key interest rate steady at 7.25%, in line with
expectations, due
to continued concern with high current account deficit (CAD).
The wholesale price
index, India's main inflation gauge, rose 4.86% in June, compared with 4.70% in
May. Consumer inflation, which gives more weight to food prices than wholesale
data, accelerated to 9.87% in June from 9.31% in the previous month.
The Indian rupee plunged
to fresh record low of 61.21 earlier this month, against the US dollar, in
trade on sustained dollar demand in the local market.
“A weak rupee exposes
the country to external shocks, given the fact that India is largely dependent
upon capital inflows to fund its important current account deficit,” said
Bundeep Singh Rangar, Chairman of London-based IndusView. “The rupee has fallen about 10% against the dollar since early May, which
is pushing up import costs and could feed price pressures in the coming
months.”
India’s CAD hit a record
$87.8 billion or 4.8% of the gross domestic product (GDP) last fiscal, up from
$78.2 billion or 4.2% in the year before.
With crude oil
price in the vicinity of $100 or more to a barrel, the government is hoping
that a 10%-12% easing of crude oil prices will help the reducing the burden on
the CAD. India imported crude oil worth $140 billion in 2011-12. India imports
nearly 70% of its crude oil requirement, which has a direct impact on the
rising CAD.
The RBI has cut its main
lending rate by three quarters of a percentage point in 2013. Industry lobby
groups and the government want it to bring the rate further down to support
economic growth that slowed to its weakest pace in a decade at 5% in the fiscal
year ended on March 31.
“The priority for
monetary policy now is to restore stability in the currency market so that
macro-financial conditions remain supportive of growth,” said Rangar. “ This
strategy can succeed only if reinforced by structural reforms to reduce the CAD
and step up savings and investment”.
Overseas
investors have pulled out more than $754 million from the Indian debt market in
the first week of this month amid concerns over depreciating rupee.
To
check imports of non-essential goods that are adding to the already rising
Current Account Deficit (CAD), the government has constituted a committee to be
headed by Rajat Bhrargav, joint secretary (Budget) in the Ministry of Finance.
The committee has been mandated to look into non-essential items in India’s
import list so that these could be pruned to ease India’s CAD. Non-essential
goods comprise luxury cars, cosmetics, certain exotic foods and beverages,
gold, silver and foreign alcohol, among others.
