RBI is done with its brief rate tightening stance: ICICI Pru MF

Short term rates are expected to respond positively to RBI’s policy stance

October 30, 2013 10:59 IST | India Infoline News Service
The RBI (Reserve Bank of India) in its Second-Quarter Review of Monetary Policy 2013-14 on Tuesday hiked the repo rate by 25 bps (basis points) to 7.75%. The central bank kept the CRR (cash reserve ratio) unchanged at 4%. 

The repo rate is the rate at which banks borrow from RBI and one basis point is equivalent to 0.01%. 

RBI Governor Raghuram Rajan, in his second policy review, has cut MSF (marginal standing facility) rate to 25 bps to 8.75%.
MSF rate is an overnight borrowing rate for banks, which eases the cost of funds for lenders, fuelling credit growth.

The central bank expects GDP at 5% in FY13-14 and CPI to remain at or above 9%.

Commenting on RBI policy, Nimesh Shah, MD & CEO, ICICI Prudential Mutual Fund, said: "Short term rates are expected to respond positively to RBI’s policy stance as the MSF rate cut and additional liquidity through term repo may reduce the overall cost of funds for the banking system. Taking this into account, overnight rates should moderate and may gradually move closer to the repo rate based on the daily liquidity conditions in the system. Though the MSF rate still remains the operative rate, RBI’s further steps to improve liquidity will finally make repo as the operative rate. Long term yields had already factored in a 25 bps repo rate hike by the RBI in this policy and going forward may likely move within a range with a downward bias.

Going forward, we expect inflation to lower, though not sharply. In fact a modest improvement in inflation amid good monsoons cannot be ruled out. We see WPI to average at around 6% through the financial year. Growth may remain subdued; we believe it will average at not higher than 4.5% for FY-14 against the RBI’s estimate of 5%. In our view, the RBI is done with its brief rate tightening stance and we do not foresee any further rate hikes in the near term, unless forced by external macro-economic shocks. We believe, as the situation continues to improve on currency and on external environment, RBI may revert to adopting an easy monetary policy to support growth."

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