After an unexpected 100bps SLR reduction in the June quarter review, RBI once again surprised the market by cutting CRR by 25bps (from 4.75% to 4.5%). The repo rate has been left unchanged at 8%. Proactive monitoring of the liquidity situation has been the focus for a while. In recent months, commercial bank’s borrowing from the central bank under LAF window has been benign (Rs0.5-0.6tn) as the deposits mobilization has improved while the credit demand has moderated. RBI is anticipating some pressure on liquidity in coming months due to the advance tax outflows and a seasonal uptick in credit growth.
Elevated inflation acting as hurdle to rate cut
RBI indicated that monetary policy response could have been more accommodative if it were not for high inflation both at the wholesale and retail levels. WPI inflation print for August came higher month-on-month at 7.55%; more importantly core inflation showed a material uptick to 6.1%. CPI has been hovering around 10% over the past few months. Near term inflation outlook also remains perturbing as the recent upward revision in diesel prices and rationalization of LPG subsidy will exert upward pressure.
Government action on fiscal consolidation lauded
RBI acknowledged the recent government actions towards fiscal consolidation through reduction of fuel subsidies and selling stakes in public enterprises and the increase in FDI. The central bank has been pushing the government to initiate necessary reforms for fiscal consolidation and reviving growth since the April annual policy review when the policy rate was proactively reduced by 50bps.
No rate action till December likely
RBI re-instated that primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations. In our view, RBI is unlikely to seriously consider policy rate action till December as headline inflation could remain above the projected level of 7% in near term and the central bank would also want to monitor the impact of government actions.
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