RBS: India strategy – Rate pause (as expected); open market operations

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India strategy – Rate pause (as expected); open market operations and 
permanent SLR reduction to provide liquidity support  

Rates unchanged
As telegraphed in the previous monetary policy review on 2 November (and in line with
expectations), the Reserve Bank of India (RBI) on Thursday paused in its tightening stance.
The repo rate was maintained at 6.25% (up 150bp since the start of the tightening cycle in
March this year), while the reverse repo rate was maintained at 5.25% (up 200bp over the
same period). The cash reserve ratio (CRR) was also maintained at 6.0%.
Permanent SLR reduction and open market operations to provide enduring liquidity
support of Rs480bn

RBI permanently reduced the statutory liquidity ratio (SLR) of scheduled commercial banks
to 24% from 25% wef 18 December 2010. However, this was offset by the reduction in the
temporary SLR relief announced on 29 November through 28 January 2011 to 1.0% from
2.0%.
Separately, the RBI will conduct open market operations of Rs480bn in the next month, with
Rs120bn conducted for the next four weeks, with the first auction conducted during the week
ending 24 December.
These two measures are expected to inject liquidity on an enduring basis of Rs480bn. To
review, the average net LAF repo amount has averaged Rs1,010bn since November due to
the persistence of large government cash balances which have averaged Rs840bn. The call
rate has been hovering around 6.8-6.9%, significantly above the policy repo rate of 6.25%.
Inflation: upside risks expected
RBI expects rising domestic input costs for the manufacturing sector combined with
aggregate demand pressures to weigh on domestic inflation. As such the document states:
“The risk to the Reserve Bank’s projection of 5.5 per cent inflation by March 2011 is on the
upside”.
RBI also mentioned that inflation continues to be a major concern, and these liquidity
measures should not be seen as a change in monetary policy.