Monetary Policy: Even the RBI is banking on election outcome! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  
  • Home
  • Outlook Arena
  • Apr 1, 2014 - Monetary Policy: Even the RBI is banking on election outcome!

Monetary Policy: Even the RBI is banking on election outcome!

Apr 1, 2014

We were not surprised to find these words of the RBI governor in the latest Macroeconomic and Monetary Developments report. "If electoral outcomes fail to provide a stable government, the downside risks to growth could accentuate. To a large part, the recovery remains contingent on improvements in the investment climate.." If at all, it indicated that even the central bank is in a wait-and-watch mode ahead of the elections.

Policy stance

In-line with market expectations, the Reserve Bank of India (RBI) in its first Bi-Monthly Monetary Policy FY15 review has maintained a status-quo. The repo rate or the rate at which the Central Bank lends money to commercial banks remains unchanged at 8.0%. Cash reserve ratio or CRR is also kept unchanged at 4.0%.

Sizeable fall in inflation since December 2013 has enabled the RBI to leave the key rates unchanged in the current policy review. But the risks to retail inflation (current 8%) remain on account of expected subnormal monsoons due to uncertain weather conditions. The GDP growth at below 5% levels is stable, but the signs of economic revival are still distant.

Economic scenario

Slowdown in growth in US, UK, Japan and continued sluggishness in Eurozone followed by tepid growth in emerging economies have restricted the global growth. Fiscal adjustments in some economies have dragged the recovery. Back home, while the GDP growth stood modest, the industrial activity continues to be a drag on the economy. Amidst this, the decline in current account deficit (CAD) (0.9% of GDP in 3QFY14) brought some respite signaling reduced external economic vulnerabilities for Indian economy. Also, while the economy is already set on a disflationary path, loss in business confidence and weak fiscal policy defies economic recovery. More importantly, if the election outcomes fail to match the positive expectations, the risks to growth could accentuate. Therefore, an improvement in investment climate can only ensure a stable economic recovery.

The way forward....

That the inflationary risks have softened is a good sign. However, this is unlikely to sustain as the retail inflation is expected to remain sticky going forward in FY15 too. This indicates the demand-side pressures would continue to stay even in the new fiscal. Moreover, the agricultural output is expected to remain sluggish in the next few quarters ensuring higher inflationary pressures.

Depending upon the inflationary outcome, the RBI expects GDP growth to settle down in the range of 5-6% in FY15. Besides, moderation in CAD during FY14 brought cheers to the economy and markets alike. However, during FY15 the CAD is expected to hover around 2% levels. But despite few positive economic developments, the consumption and investment demand continues to remain subdued.

The central bank too is banking on the election outcome. With a new and stable government in power, favorable developments such as structural reforms and the fiscal consolidation are expected to tame inflation and stoke growth rates. Easing of supply bottlenecks and clearing of stalled projects would be instrumental in lifting corporate profitability. This coupled with improvement in liquidity conditions would also provide the much required boost to the credit growth.

However it would be too premature to estimate the impact of reforms on RBI's policy stance since global geo political risks can also play a part. Hence we believe that investors have very little reason to change their allocation in response to Monetary Policy or ahead of elections.

Equitymaster requests your view! Post a comment on "Monetary Policy: Even the RBI is banking on election outcome!". Click here!


More Views on News

5 Indian Banks with the Lowest NPAs. Here's How they Did It... (Views On News)

Sep 27, 2021

These banks have managed to maintain their asset quality even in the middle of a pandemic.

PNB Reports an Over Three-Fold Jump in Net Profit as Provisions Fall (Views On News)

Aug 3, 2021

The reduction in provisions for bad loans and asset quality stability may have aided the lender's earnings.

Here's Why IndusInd Bank's Net Profit Doubled in the June Quarter (Views On News)

Jul 28, 2021

All you need to know about the latest quarterly results of IndusInd Bank.

Axis Bank's Stock Falls as Results Disappoint on Asset Quality (Views On News)

Jul 27, 2021

Axis Bank's net profit more than doubles on a spike in other income and lower provisioning.

ICICI Bank's Quarterly Results Sends Stock to 52-Week High (Views On News)

Jul 26, 2021

ICICI Bank expects to maintain margins at the same level in coming quarter.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 26, 2021 (Close)