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RBI'S MID-QUARTER MONETARY POLICY REVIEW
RBI leaves rates unchanged; announced measures to ease
liquidity pressure, as expected!
RBI retained its CRR, repo and reverse repo rates, while reducing the SLR
rates permanently by 1% to 24%. It also announced to conduct open market
operation (OMO) auctions for purchase of government securities for an
aggregate amount of Rs.480 bn in the next one month (Rs.120 bn every
week).
The policy statement made it clear that it is uncomfortable with the
excessive deficiency of liquidity. RBI announced measures to infuse liquidity
in the system without sending any contradictory signal towards their
monetary tightening stance.
This monetary policy stance makes us believe that the pause in tightening
measures is temporary and is dependent on inflation, liquidity and growth
dynamics going forward. We expect RBI to raise rates further over the
course of next year.
RBI retained its CRR, repo and reverse repo rates, while reducing the SLR rates
permanently by 1% of NDTL to 24% with effect from December 18, 2010. It also
announced to conduct open market operation (OMO) auctions for purchase of
government securities for an aggregate amount of Rs.480 bn in the next one month
(Rs.120 bn every week). The above two measures are expected to inject liquidity of
about Rs.480 bn.
Policy Measures Announced
n Cuts SLR to 24% from 25% with effect from December 18, 2010
n To conduct OMO to the tune of Rs.480 bn in next one month
n Additional liquidity support of 1% available from December 18 to January 28
n CRR, Repo and reverse repo rates unchanged
The stance of monetary policy is intended to
n Release sizable primary liquidity into the system
n Bring down the liquidity deficit in the system close to the comfort zone of the
Reserve Bank
n Stabilize interest rates in the overnight inter-bank market closer to the operative
policy rate of the Reserve Bank.
Liquidity concerns to ease going forward…
The overall liquidity in the system remained in deficit zone consistent with the policy
stance; however the extent of tightness has been beyond the comfort level of the
RBI, as RBI has been injecting liquidity on a daily average of ~Rs.1 tn. These large
injections of liquidity were primarily driven by an increase in government cash
balances which stood at Rs.880 bn. Now, the situation is likely to worsen further due
to Rs.550 bn worth of advance tax payments bulging the government credit balance
with RBI. In addition, the liquidity deficit was further accentuated by structural factors
such as significantly above-trend currency expansion and relatively sluggish growth in
bank deposits even as the credit growth accelerated in FY11.
To summarize, we believe that RBI action is towards achieving trend growth of the
economy along with managing inflationary expectation. Even as inflation has
moderated, it remains significantly above the comfort level of the RBI with risk to
inflation on the upside, given high crude and global commodity prices. RBI has even
cautioned that such provision of liquidity should not be construed as a change in the
monetary policy stance since inflation continues to remain a major concern.
We believe that the current liquidity measures shall ease off the pressure a bit but
may not be fully sufficient if the government spending does not pick up and the
advance tax payments remain in the vault.
The current monetary policy stance makes us believe that the pause in tightening
measures is temporary and is dependent on inflation, liquidity and growth dynamics
going forward. We continue to expect that RBI would continue with its monetary
tightening stance over the course of next year.
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