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RBI on an extended pause mode

India Infoline News Service | Mumbai |

If inflation does not decelerate as expected, RBI could tighten monetary policy, says Ashutosh Datar of IIFL.

RBI’s monetary policy is along expected lines. RBI is on an extended pause mode and will act only when it feels that inflation trajectory is not evolving according to its glide path - 8% by March 2015 and 6% by March 2016, says Ashutosh Datar of IIFL Institutional Equities.

 

“ If deceleration in inflation is faster, RBI will ease monetary policy. If inflation does not decelerate as expected, RBI could tighten monetary policy. Additionally, RBI is waiting for clarity on monsoons, given the risk of El Nino and the budget to get a sense on medium-term fiscal consolidation road map,” says Datar.

 

“A rate cut in 2014 is unlikely. We expect a rate cut in first quarter of 2015 with the assumption that monsoons will be only modestly below normal and the impact on food inflation will be modest," adds Datar.  

?Following are the highlights of the Second Bi-Monthly Monetary Policy Statement, 2014-15 by Dr. Raghuram G Rajan, Governor 

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

  • keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0%;
  • keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0% of net demand and time liabilities (NDTL); 
  • reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23.0% to 22.5% of their NDTL with effect from the fortnight beginning June 14, 2014; 
  • reduce the liquidity provided under the export credit refinance (ECR) facility from 50% of eligible export credit outstanding to 32% with immediate effect;
  • introduce a special term repo facility of 0.25% of NDTL to compensate fully for the reduction in access to liquidity under the ECR with immediate effect; and
  • continue to provide liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system.
  • Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0%, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0%.
 

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