Monetary Policy: Staggered liquidity easing - Views on News from Equitymaster

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Monetary Policy: Staggered liquidity easing

Aug 5, 2014

In the bi-monthly Monetary Policy review today, the RBI kept the key lending rate (repo rate) unchanged. Repo rate or the rate at which at the Central Bank lends money to commercial banks remains unchanged at 8.0%.Even the cash reserve ratio stayed at 4%. However, in an effort to ease some liquidity the statutory liquidity ratio (SLR) was reduced from 22.5% to 22%. In the last policy review too, the central bank had chosen to tinker with the SLR, while keeping other rates unchanged.

The RBI's inflation target, as measured by the Consumer Price Index (CPI), is below the 8% mark by early 2015, and 6% by early 2016. The central bank believes that the recent fall in international crude prices, the benign outlook on global non-oil commodity prices and still-subdued corporate pricing power should support disinflation. However, pass-through of administered price increases, continuing uncertainty over monsoon conditions and possibly higher oil prices stemming from geo-political concerns can thwart RBI's inflation control efforts.

The RBI's estimate of GDP growth of 5.5% for FY15 is also backed by recent pick-up in industrial activity, assumptions of revival of investment cycle and unlocking of stalled projects, fiscal consolidation releasing resources for private enterprise, external demand picking up and international crude prices stabilizing.

What to expect?

The RBI's latest move has come in anticipation of revival in economic activity, fall in consumer inflation and fiscal tightening. If the economic parameters fail to reach RBI's target the central bank may again review its liquidity stance. Meanwhile, it is unlikely that banks will want to bring down the deposit and lending rates too soon. Growth in credit in the near term will therefore largely depend on economic revival as against fall in interest rates.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro Equitymaster's oldest recommendation services. She is also the editor of Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.

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