Monetary Policy: In anticipation of low inflation - 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?  

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.

Equitymaster requests your view! Post a comment on "Monetary Policy: In anticipation of low inflation". Click here!


More Views on News

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

More Views on News

Most Popular

A Complete Guide for Beginners on How to Invest in IPOs

As an investor, you must have endeavoured to find a suitable opportunity for investing in IPOs. But do you know what is an IP...

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms