RBI keeps rates unchanged in line with expectations - Angel Broking

The Reserve Bank of India (RBI) in its First Bi-monthly Monetary Policy Statement, kept the policy repo rate unchanged at 8.0%, in line with our and market expectations. Consequently, the reverse repo remains unchanged at 7.0% and the Marginal Standing Facility (MSF) at 9.0%. The Cash Reserve Ratio (CRR) too has remained unchanged at 4.0% of banking system's net demand and time liability (NDTL).

The RBI's policy actions are increasingly gearing towards bringing headline CPI inflation to 6.0% by January 2016, consistent with the Urjit Patel Committee report's recommendations. The rationale for holding rates during the policy meeting is also on account of letting the rate hikes taken in September 2013-January 2014 to work their way through the economy. The RBI has decided to increase the liquidity provided under 7-day and 14-day term repos from 0.5% of NDTL of the banking system to 0.75% and decrease the liquidity provided under overnight repos under the liquidity adjustment facility (LAF) from 0.5% of bank-wise NDTL to 0.25%. Going forward too, policy is likely to remain data-dependent and the policy statement indicates that in case inflation decelerates, as is being expected, further policy tightening is unlikely, at least in the near-term.

Status quo maintained on policy rates

Headline Wholesale Price Index (WPI) as well as Consumer Price Index (CPI) inflation eased during February 2014, owing to cooling off in food prices led by the continued normalization of vegetable prices in particular. The WPI based inflation moderated for the third straight month to 4.68% during February 2014 as compared to 5.05% in January 2014 and 7.28% in February 2013. CPI inflation moderated for the third straight month to 8.10% in February 2014 as compared to 8.79% in January 2014. Nonetheless, core CPI inflation has continued to remain sticky at about 8.0% and owing to this, the RBI has continued to maintain that 'some demand pressures are still at play' in spite of the sluggishness in growth.

Stance remains cautious on upside risks to inflation

The policy statement also states that on account of seasonal factors going forward further softening in vegetable prices is unlikely. In addition, the policy has also pointed to certain upside risks to inflation emanating from possible El Nino effects; uncertainty on setting of minimum support prices and other administered prices especially of fuel, fertilizer and electricity; outlook for fiscal policy; geo-political developments and their impact on international commodity prices. We continue to believe that going forward too monetary policy actions are likely to remain data-dependent.

Source : Equity Bulls

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