SUBBARAO TAKES TOUGH STANCE IN HIS LAST POLICY

RBI Governor D Subbarao with deputy Governors H R Khan, K C Chakrabarty, Urjit R Patel and Anand Sinha 

RBI Governor D Subbarao today said liquidity tightening steps were not a panic reaction and he refused set a timeline to reverse them, justifying the measures to tame the rupee and keep policy rates unchanged. This is his last policy as he is retiring on September 5th after leading RBI for 5 years...RBI's next Mid Term policy review will be on September 19th. This is Subbarao's 20th Monitory Policy...
"We are as anxious as anyone else to roll these back. But getting locked into a time frame is both not feasible and inadvisable," Subbarao told reporters at the customary post-policy meeting here this afternoon. Subbarao left all key policy rates unchanged and called for urgent measures from the government to contain the current account deficit, which is the main reason for the rupee declining close to 12 per cent since April 1. The recent liquidity tightening measures are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, the RBI said. "I don't agree with those charges (of being divergent in our stance and panicky). 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 the rollback of these measures is state-contingent and data-dependent and linked to the decline in volatility and disorderly movements in the exchange rate. Explaining the rationale for the July 15 and 23 measures to tighten liquidity, 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." 
Subbarao said the idea was to make liquidity scarcer and more costly. The RBI determined that modulating access to LAF would be the most efficient way of controlling volatility and it can be calibrated more flexibly than resorting to CRR or repo because of other implications attached to those measures, he said. "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. The Governor said some of the indicators the RBI will monitor are the bid-ask spread, the intra-day volatility in the exchange rates, forward contracts to evaluate importers' assessment, volumes and open interest positions in the futures market, options pricing and the forward premia. The rupee declined 106 paise to close at 60.47 against the dollar, a three-week low. The currency touched a record low of 61.21 on July 8. Subbarao said "there is enough arsenal with the RBI to contain volatility in the exchange rate" if the steps taken so far don't work, but he declined to provide details.
Over the next 6-12 months, USD 174 billion of external debt has to be repaid, while depleting foreign-exchange reserves, which stood at USD 280 billion as of last week, have reduced the import cover buffer to about six months.