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Monetary Policy: In anticipation of low inflation - Views on News from Equitymaster
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Monetary Policy: In anticipation of low inflation
Sep 30, 2014

It is not as if Governor Dr Rajan has not taken note of the positive cues emanating in terms of economic revival. It is not just the higher GDP growth rate but inflation too, which has shown signs of cooling off in recent months. However, not being satisfied without putting the inflation demon to rest, the RBI wants more evidence. It needs evidence that the government is taking steps to check all the problems that stoke food prices and consumer inflation. And without that any liberal stance will not find its way to the Monetary Policies.

A much expected status quo

As widely expected the Reserve Bank of India (RBI) in its fourth bi-monthly monetary policy statement has kept key rates unchanged. While the key repo rate continues to stand at 8%, the reverse repo also remains at 7%. Repo rate is the rate at which RBI lends money to banks for short-term. The RBI has also kept both the statutory liquidity ratio (SLR) (22%) and the cash reserve ratio (CRR) (4%) unchanged. SLR is the minimum bond holding requirements that lenders must set aside, while CRR determines the percentage of bank deposits that must be kept at the central bank. However, in the previous policy review, the central bank had chosen to tinker with the SLR in an effort to boost liquidity in the system.

Considering the risks pertaining to consumer inflation (CPI) moving closer to the target of 6%, the status-quo policy is on expected lines. While inflation has seen some moderation in recent periods thanks to the softening international crude prices and the foreign exchange market stability, the food price risks continue to raise its ugly head. The Governor expects a higher number of 7% by next year end.

The GDP growth projections of the apex bank have been retained at 5.5% for FY15 and 6.3% for FY16. The RBI has also notified about easing liquidity pressures on account of lower credit growth that continues to lag the deposit growth. The non-food credit has been decelerating and stood lowest during September since last 14 years.

What to expect?

The key policy takeaway remains that the central bank is now focused on achieving the 6% CPI target. Sounding cautious, the RBI's current stance stems from the anticipation of revival in economic activity, softening consumer inflation and fiscal tightening. In light of emphasis on liquidity boost strategy, it seems quite unlikely that the RBI may opt for any rate cuts during the current calendar year.

As for the banking system, growth in credit in the near term will largely depend on economic revival as against fall in interest rates.

Shweta Daptardar-Mane

Shweta Daptardar-Mane, has an MBA (Finance) degree and over five years of equity research experience. She passionately tracks the Banking and Finance industry and follows the macro developments in the economy, particularly the central bank monetary policy. She is deeply inspired by not only Buffett's investment acumen, but also by his infectiously charismatic, down-to-earth persona. Shweta is the contributor to our large cap franchise, StockSelect.

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