Third Bi-Monthly Monetary Policy Statement 2014-15: More hawkish than what meets the eye

As expected, the repo rate and CRR were left unchanged at 8% and 4% respectively.

August 08, 2014 3:24 IST | India Infoline News Service
Policy rate unchanged; another 50bps SLR reduction
As expected, the repo rate and CRR were left unchanged at 8% and 4% respectively. Following 50bps reduction in the June policy, RBI announced another 50bps cut in SLR requirement for banks to 22% of NDTL. With the banking system SLR holdings at 4-6% higher than statutory requirements, announced SLR reductions are unlikely to benefit banks until credit demand picks-up vigorously and excess SLR comes-offs. Further, to enhance liquidity in the money and debt markets, RBI lowered the SLR investments ceiling within HTM category by 50bps to 24.5% of NDTL. Banks will now have to mark-to-market the released portfolio. 

Risks to 8% CPI January 2015 target seems more balanced
The central bank expects sustained deceleration in CPI in the very near term on account of fall in crude prices, benign outlook on non-oil commodity prices and still muted corporate pricing power. However, it assigns credible probability to retail inflation clawing back towards 8% by January 2015 due to upside risks from pass-through of administered price increases, sub-par performance of monsoon, geo-political concerns impacting oil prices and currency and stronger-than-expected growth revival in the face of continuing supply constraints. 

… but risks to 6% CPI January 2016 target remain high
As per RBI, the balance of risks around the medium-term inflation path is still on the upside and government’s action on improving food supply and accelerating project execution and completion would be critical to offset pressure from strengthening of aggregate demand on the back of a pick-up in consumer and business confidence.

Pause to be more prolonged; expect no rate cut in FY15 
Less perturbed about achieving its January 2015 inflation target of 8%, RBI is now staunchly focused on guiding inflation towards 6% by January 2016. With singular aim of ensuring sustained disinflation over the medium term, the central bank is likely to hold rates through the remainder of the fiscal. Further, the timing of initiating rate easing in FY16 would be contingent on evolution of a lower risks scenario to its stated inflation target. 

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