Inflation Priority for RBI in Growth-Inflation Dynamics Lending Rates to Remain High Monetary Policy Stance: Amid India’s evolving growth-inflation dynamics, the Reserve Bank of India’s (RBI) current monetary policy stance clearly reflects its intention to anchor both inflation and inflationary expectations. India Ratings & Research (Ind-Ra) believes that this has been triggered by the reversal of the declining trajectory of Whole Price Index (WPI) inflation, high retail inflation and suppressed economic inflation due to the recent INR depreciation. RBI Surprises on Policy Rate: RBI in its mid-quarter policy review on 20 September 2013 hiked the repo rate by 25bp to 7.5% and the reverse repo rate to 6.5%. Conversely, as expected some of its exceptional measures in the wake of weakening INR in the past two months have been reversed to some extent. It has reduced the marginal standing facility (MSF) rate and the minimum daily maintenance of the cash reserve ratio (CRR) to 9.5% from 10.25% and 95% from 99% of the requirement from the fortnight beginning 21 September 2013, keeping CRR unchanged at 4.0%. Liquidity Tightening Measures Temporary: RBI has again stated that the exceptional measure taken to tighten the liquidity in the recent past will be eased in a calibrated manner in response to the improvement in the external environment. Ind-Ra believes that this will not happen any time soon and will be contingent upon the improvement in the current account deficit (CAD) and the prospect of funding CAD through more stable form of capital inflows. Tapering off of QE: US Fed’s decision to hold the tapering off of quantitative easing (QE), no doubt surprised many, it certainly has not impressed RBI. RBI has correctly assessed that the tapering off of QE, if not now, is inevitable, and a country like India which is funding its CAD primarily through volatile portfolio inflow cannot afford to overlook structural factors that are driving CAD. Growth to Pick-up in H2FY14: According to RBI, the current weakness in growth is due to sluggishness in both the industrial and services sectors’ activity. Consequently, growth is trailing below the potential, leading to the widening of the gap between the actual and potential output. However, RBI is hopeful of a growth revival in H2 led by improvements in agriculture and exports. Ind-Ra also believes growth will pick up from Q3FY14, if measures for higher rural and export demand, coupled with those related to large infrastructure projects, are implemented. Money Market Rate to Decline: Tighter liquidity leading to MSF operationalising as the borrowing window under liquidity adjustment facility (LAF) resulted in a higher rate of interest in the money market. The call money rate, which was hovering between 7.2% and 7.5% in May 2013, increased to over 10% between mid-August 2013 and mid-September 2013. As the MSF rate has been reduced to 9.5%, Ind-Ra expects the call money rate to fall and fluctuate between the LAF corridor of 6.5% and 9.5%. No Relief to Consumer: With the repo rate going up and the MSF rate and the minimum daily maintenance of CRR declining, it is a mixed bag for banks so far as their lending rates are concerned. However, Ind-Ra does not expect any cut in the base rate of banks. On the contrary, in select cases it might actually go up.
Posted on: Sat, 21 Sep 2013 00:38:53 +0000
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