Mid-Quarter Monetary Policy Review.
Status quo on repo rate and CRR
Key High lights
1.Keeps SLR and CRR unchanged at 24.0% and 4.75%, respectively
2.Holds on to key policy rates (Repo: 8.0%, Reverse Repo: 7.0% and MSF: 9.0%)
Monetary policy maintains status quo as against consensus expectation of easing: The Reserve Bank of India (RBI) in its mid-quarterly monetary policy review has kept both CRR and repo rate unchanged, as against street’s expectation of a monetary stimulus.
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Markets expectations were on the backdrop of evident domestic slowdown, as reflected from the recent weak set of economic data (IIP disappointing at 0.1%, GDP growth moderating to 5.3%) and moderating core inflation (even though primary inflation remained above comfort levels). However, RBI eluded from any such measures stressing that the role of interest rates in the current activity (particularly investment) slowdown remains relatively small and after considering significant upside risks to inflation expectations.
Though core inflation (non-food manufactured food inflation) has moderated, RBI remained concerned about the uptrend seen in headline inflation reading, which has moved upwards to 7.6% in May 2012 from 7.2% in April 2012, mainly on higher food and fuel prices. Primary food inflation has, in fact, increased from negative 0.7% in January 2012 to 10.7% in May 2012 on the back of higher vegetable prices. Further, consumer price index (CPI) inflation rose from 8.8% in February 2012 to 10.4% in April 2012, indicating that moderation in wholesale price inflation has not transmitted to the retail level.
Despite demand slowdown and lower crude prices, upside risks to inflation expectation remain high on the back of a) supply bottlenecks, b) recent revision in MSP prices of kharif crops such as paddy, jowar, cotton and pulses, which have a cumulative weight of ~28.5% and ~4.0% in determining food inflation and primary inflation, respectively, in the range of 15-50%, c) long anticipated deregulation of diesel prices and d) lower-than-expected monsoon (as some of the recent reports have indicated) leading to sell-off of agriculture produce at a price much higher than MSP. These upside risks to inflation expectations have also been one of the reasons that prompted RBI to postpone any form of monetary stimulus.
Liquidity to be managed through OMOs: RBI also did not cede to market/industry expectation of a CRR cut. That said, as per our calculations, taking into account the primary liquidity required to be infused in FY2013 as well as YTD depletion in forex reserves, the RBI will be in a position to infuse `1.7–2.0 lakh crores into the economy through OMOs. This should keep bond yields in check at current levels (8-8.25% for the 10-year bond yields).
Moreover, RBI enhanced the eligible limit of export credit refinance (ECR) facility for scheduled banks from 15% of the outstanding export credit to 50% to provide additional liquidity support of over `30,000cr to banks.
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