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RBI’s First Bi-monthly Monetary Policy Statement 2014-15 - ‘No surprise this time!’

India Infoline News Service | Mumbai |

RBI is firmly focused on keeping the economy on a disinflationary glide path of 8% CPI by January 2015 and 6% by January 2016.

No rate action; committed to keep liquidity comfortable   
In-line with consensus expectations, RBI kept the repo rate and CRR unchanged at 8% and 4% respectively. While decreasing the liquidity provided under overnight repo facility to 0.25% of NDTL, central bank increased facility under the 7-day and 14-day term repos to 0.75% of NDTL. As per RBI, this should improve the transmission of policy impulses across the interest rate spectrum. Since introduction, the term repos have evolved as a useful indicator of underlying liquidity conditions. The central bank has been committed to monitoring and actively managing liquidity conditions to ensure adequate flow of credit to productive sectors. In our view, the liquidity situation is expected to remain supportive of easing in wholesale funding rates. 
 

Focused on upside risks to inflation
RBI is skeptical about the sustainability of waning food inflation pressures seen in recent months and interprets stickiness of core inflation as manifestation of residual demand pressures in the economy. The central bank sees upside risks to its 8% CPI forecast for January 2015 from a below-normal monsoon due to possible ‘el nino’ effects, increase in MSPs, increase in other administered prices and geo-political developments leading to higher international commodity prices. At the same time it is unwilling to act on any transient or statistical downward pull in inflation. 
 

Policy stance unchanged; no change in our rate cut expectations also
RBI is firmly focused on keeping the economy on a disinflationary glide path of 8% CPI by January 2015 and 6% by January 2016. A status quo on policy rate would provide more time for the preceding rate hikes to transmit through the economy and contain inflationary pressures. In our previous policy note we had mentioned that there could be a fairly long phase of ‘monetary pause’. We retain that view and expect rate easing in FY15 to be limited to 50-75bps.
 

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