Status-quo on Policy Rate Aimed at Bringing CPI Inflation to 6% by January 2016 - India Ratings
Author(s): City Air NewsNew Delhi, September 30, 2014: The Reserve Bank of India’s (RBI) policy stance of maintaining status-quo on policy rates (repo 8%, reverse repo 7% and marginal standing facility 9%) in its fourth bi-monthly monetary...
cityairnews
Sep 30, 2014 12:30
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New Delhi, September 30, 2014: The Reserve Bank of India’s (RBI) policy stance of maintaining status-quo on policy rates (repo 8%, reverse repo 7% and marginal standing facility 9%) in its fourth bi-monthly monetary policy statement is in line with India Ratings & Research’s (Ind-Ra) expectations. Even though inflation has been declining, the RBI is of the view that it is too early to assume that it is firmly under control. We agree with the bank’s view and believe that under the current macroeconomic environment, this is the correct assessment.
We believe the rainfall from the south-west monsoon, which is now expected to be about 12% lower than the long-period average, will weigh on the kharif crop, mainly due to its uneven spatial distribution. Although the Consumer Price Index (CPI) inflation came in at 7.8% in August 2014, the contribution of food inflation to headline inflation is still about 60%. Ind-Ra believes the RBI would rather wait than make the mistake of changing the policy stance before the inflation has been effectively tamed. We believe monetary easing will not be possible before 4QFY15. Also, the balance of risks is still on the upside due to risks from food price shocks and geo-political developments in the middle-east. The RBI has been trying to take the economy on a disinflationary course by containing the CPI inflation, its new nominal anchor, to 8.0% by January 2015 and further to 6% by January 2016.
As the liquidity in the system remained largely balanced, the recourse to liquidity provided under the export credit refinance (ECR) has declined. Therefore, the RBI has reduced the ECR facility from 32% of the eligible export credit outstanding to 15% effective 10 October 2014. The RBI is keeping a close watch on liquidity. Its liquidity management framework was changed effective 5 September 2014. As a result, the RBI is now carrying out increased 14-day term repos and daily overnight variable rate repo operations to ensure flexibility, transparency and predictability in liquidity management operations.
(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research- A Fitch Group Company.)
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