Credit Policy - View Point by Elara Capital

Highlights and Analysis of Credit Policy

- Increase of repo rate by 25bps to 5.75% and reverse repo rate by 50bps to 4.5%; leaving CRR unchanged at 6.0%.

Our viewpoint: Different quantum of moves in Key rates is a step in right direction as it reduces the width of Liquidity Adjustment Facility (LAF) corridor, which in-turn reduces the scope for interest rate volatility and increases the effectiveness of monetary transmission.

- Forecast for GDP growth rate for this financial year has been inched up to 8.5% (from 8% with an upward bias in April review). With growth taking firm hold on domestic front and is becoming increasingly broad-based, the balance of policy stance to shift decisively to contain inflation and anchor inflation expectations. At the same time, RBI showed nervousness in taking big steps to normalize interest rate given the uncertainty about the recovery in developed world.

Our view point: This is first time RBI is showing hawkish stance (at least through their commentary) towards containing inflation. Though we believe that RBI has lagged behind the curve in normalizing interest rates, choosing inflation a top priority concern in current policy review sends a positive signal to market that RBI is increasingly getting serious about double digit inflation. We believe that if RBI maintains its hawkish stance (followed by actions), it could help to strengthen the rupee, which in-turn could help to combat inflation.

- To have a flexibility to maneuver in rapidly evolving macroeconomic situations, RBI would undertake mid-quarter reviews roughly every 6 weeks.

Our view point: The current disparity of growth between India and developed world is increasingly making the job of RBI tougher to strike a balance between growth and anchoring inflation. In that regard, to have a mid-quarter reviews is a positive step from RBI as it takes off the surprise element in off-cycle actions and provide timely transparency of the RBI thinking.

Source : Equity Bulls

Keywords