Reserve Bank’s decision to maintain status quo on interest rates has been influenced by external sector considerations, specially the widening current account deficit, Chairman of Prime Minister’s Economic Advisory Council, C. Rangarajan, has 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 (CAD) 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,” Mr. Rangarajan said post-RBI policy announcement.
The RBI in its first mid-quarter policy review on Monday kept key interest rates unchanged because of elevated food inflation, rupee depreciation and uncertainty over foreign fund inflows.
Mr. Rangarajan said food inflation still remains high but with monsoon progressing, the expectations are that food prices might come down.
Rupee had hit an all-time low of 58.96 per US dollar last week on concerns that the US Federal Reserve might pull back its quantitative easing programme in a phased manner.
Mr. 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.
