RBI reduces repo rate by 25bp on expected lines - Monetary Policy Review - Angel Broking

Policy Measures

- The Reserve Bank of India (RBI) in its Monetary Policy Review delivered on expected lines and reduced the Repo Rate by 25bp from 7.50% to 7.25%.

- Consequently, the Reverse Repo Rate stands adjusted to 6.25% and the Marginal Standing Facility Rate and Bank Rate stand adjusted to 8.25%.

- The Cash Reserve Ratio remains unchanged at 4.00% of banks' NDTL.

- RBI maintained a cautious stance and indicated that there is a ‘little' space for further monetary easing. While it acknowledged lower inflation trajectory going ahead, it expressed caution with respect to the Capital flows and the CAD, and as a result, mentioned only limited headroom for further monetary easing. In line with this, we expect another one or two rate cuts going ahead, while positive surprise in forthcoming inflation readings, may provide further headroom.

Policy addresses accentuated risks to growth...

As per the RBI, the two main considerations behind the continuance of the growthsupportive monetary policy were 1) the recent deceleration in economic activity along with the expectations of gradual and modest economic recovery from here on and 2) the recent gradual moderation in WPI inflation (particularly ebbing of core inflation).

Real GDP growth has slowed much more than expected (at 4.5% during 3QFY2013, the lowest in 15 quarters). The economic recovery from here on is likely to be gradual and modest and as per the RBI, GDP in FY2014 is likely to grow by 5.7%. RBI projects banking system credit to grow by 15% and deposits by 14% in FY2014.

... However, stance remains cautionary

Notwithstanding, the recent correction in the international commodity prices (incl. gold, crude etc.), the RBI expressed caution considering 1) the need to keep differential with the global interest rates high, so as to keep attracting capital flows to finance the precarious current account deficit, 2) the near-term upside risks to inflationary expectations, stemming from supply-side bottlenecks, elevated food inflation and the ongoing correction in administered fuel prices, and 3) the elevated CPI inflation

Source : Equity Bulls

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