RBI Monetary Policy — Annual Policy 2013-14 - Eastern Financiers

The Central Bank continued to remain cautious in its approach amidst what it calls "...an environment of incipient signs of stabilisation in the global economy and prospects of a turnaround, albeit modest, in the domestic economy". While RBI acknowledged the fact that domestically, growth slowed much more than anticipated, with both manufacturing and services activity hamstrung by supply bottlenecks and sluggish external demand and Inflation has receded significantly during the last few months yet it outlined that at this point there are significant up-side risks to inflation and hence monetary stance needs to take that into account.

RBI, in its Mid quarter Policy review slashed the Repo rate, rate at which Banks borrow from RBI by 25 BPS to 7.25 percent from 7.50 percent. Consequently, the reverse repo rate - the rate at which RBI borrows from Banks, gets adjusted to a percentage point below the repo rate at 6.25 percent. The Marginal standing Facility (MSF) rate and the Bank rate now stand at 8.25 percent, being 100 basis points more than the repo rate. CRR- the portion of deposits that banks keep as reserves with the Central Bank, was yet again not touched by the RBI and remains unchanged at 4%.

Cumulatively, during the full year 2012-13, the policy repo rate was reduced by 100 basis points, the SLR by 100 bps and the CRR by 75 basis points, supported by liquidity injections through OMOs of the order of Rs.1.5 trillion. After reducing the policy repo rate by 25 bps in its Mid-Quarter Review (MQR) of March 2013, the Reserve Bank this time has noted that in view of the policy easing already affected and the sluggish ebbing of inflation & widening CAD, the headroom for further monetary easing is quite limited, going ahead.

While globally, many central banks have resorted to monetary easing in order to fuel growth, the RBI remains comfortable being extremely cautious in easing interest rates. This time, the Apex Bank's 25BPS repo cut was very much on anticipated lines but what is more important in the policy statement is that while there has been signs of easing inflation and growth decelerating consistently, the RBI is in no-hurry to ease interest rates and on the contrary, it is strictly monitoring the CAD & fiscal deficit situation and has said that it could even reverse its stance, if required. The verdict from The RBI is loud and clear - "VERY LITTLE ROOM FOR FURTHER RATE CUTS".

Source : Equity Bulls

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