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http://www.kotaksecurities.com/pdf/dmb/MorningInsight18042012.pdf
RBI: MONETARY POLICY FOR FY13
RBI Cuts Rates by 50bps; addresses liquidity issues prioritizing growth
RBI cut policy rate by 50 bps surprisingly, prioritizing growth in the growthinflation dynamics. We opine going forward rate cuts are likely to be
smaller and slower and dependent on trilogy of inflation, growth and
external front.
The surprise move from the RBI is likely to perk up business sentiments a
bit. We believe that, the impact of these rate cuts will be magnified only
when these are followed up by corresponding action on the fiscal front. The
RBI has once again prodded the Government to act on the fiscal deficit by
increasing retail fuel prices.
We also understand that, the purpose of the rate cut will be served once the
administrative and structural reform initiatives are implemented. Businesses
are awaiting action on issues like land acquisition, mining, power, FDI, etc.
We believe that, the markets will start taking positive cues from this and
start moving up on sustainable basis once these measures are taken up and
implemented. We remain optimistic on the markets over the medium to
long term. However, in the short term they may continue to react to
quarterly numbers, monsoons and global markets.
Monetary/Liquidity Measures Announced
Reduction in Repo rate by 50 bps to 8.0 from 8.5%, consequently reverse repo
stands at 7.0%
Marginal standing facility (MSF) stands at 9%; scheduled commercial banks'
(SCBs') borrowings under MSF has been increased from 1% to 2% of NDTL to
ease liquidity pressure without SLR restriction
CRR remains unchanged at 4.75% of bank's NDTL
Other key announcement included the abolition of foreclosure charges/pre-payment
penalties on floating-rate home loans and a reduction in the ceiling for exposure in
'gold-loan' NBFCs.
Monetary Policy Stance
To adjust the policy rates to levels consistent with the current growth moderation
To guard against risks of demand-led inflationary pressures re-emerging
To provide greater liquidity cushion to the financial system
Expected Outcome of policy
To stabilize growth around its current post-crisis trend (estimated at 7.5%)
To contain risks of re-surging inflation and inflation expectations
To enhance liquidity cushion available to the system
Guidance for future policy actions
Modest deviation of growth from its trend with upside risks to inflation, inherently
limits the space for further reduction in policy rates.
