Fifth Bi-monthly Monetary Policy Statement, 2014-15 :: IndiaNivesh, links

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In line with our expectations, the Reserve Bank of India (RBI) continued to maintain
status-quo and it kept the repo rate unchanged at 8.00% in its fifth Bi-monthly
monetary policy review 2014-15.
Monetary and Liquidity Measures:
On the basis of an assessment of the current and evolving macroeconomic situation,
the RBI has decided to:
 keep the policy repo rate under the liquidity adjustment facility (LAF)
unchanged at 8.0%;
 keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0% of
net demand and time liabilities (NDTL);
 continue to provide liquidity under overnight repos at 0.25% of bank-wise
NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of
up to 0.75% of NDTL of the banking system through auctions
 continue with daily one-day term repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0%,
and the marginal standing facility (MSF) rate and the Bank Rate at 9.0%.


Other Important Points:
 Survey-based inflationary expectations have been coming down with the fall
in prices of commonly-bought items such as vegetables, but are still in the
low double digits.
 Liquidity conditions have eased considerably in Q3FY15 and as a result banks
borrowing through MSF (on an average) has declined from Rs 803 bn in Q1FY15
to Rs 476 bn in Oct-Nov’ 14.
 The use of export credit refinance also declined from 52.6% of the limit in Q2
to 32.6% in Oct-Nov’ 14.
The sixth bi-monthly monetary policy statement is scheduled on Tuesday, February
03, 2015.


Conclusion:
The policy outcome was as per expectations. As we mentioned in our preview, the
RBI’s tone (language) regarding its comfort about achieving its inflation target of
January 2016 will be more important for future direction of the market. The RBI is
assessing the risks to its January 2016 inflation forecast as ‘balanced’ now as
compared to ‘biased upside’ in the previous monetary policies. In addition to, the
RBI also mentioned, “If the current inflation momentum and changes in inflationary
expectations continue, and fiscal developments are encouraging, a change in the
monetary policy stance is likely early next year, including outside the policy review cycle”. The RBI’s tone was more of dovish which is positive for the Banking, Financial
services and Institutions (BFSI) industry and BFSI stocks.
Overall, the RBI is reasonably confident of achieving its 6.0% inflation target by
January 2016. However, the RBI is wary of policy flip-flops and highlights that if and
when the policy stance shifts, subsequent policy actions will be consistent with the
changed stance. It shows that the RBI would like to start reducing policy repo rate
only when CPI number comes below 6.0% even after the base effect wears off and
also seems sustainable at that level going forward.
RBI’s framework puts greater weight on policy stability and positive real rates in the
economy. As the RBI seems more confident on these two parameters now, the RBI
is likely to start an easy money policy soon. However, the RBI would like to monitor
inflationary trends of Dec-Mar’ 15 (as there will be no base effect benefits) and
fiscal consolidation by the government in FY15 before announcing any reversal in
monetary policy. Overall, we expect RBI to announce cut in policy repo rate in its
first bi-monthly monetary policy meet of FY16. There is also a possibility that the
RBI may announce rate cut in early March 2015, immediately after the Union Budget,
as the RBI has mentioned in its policy document that it can announce rate cut outside
the policy review cycle also.


link
http://www.indianivesh.in/Admin/Upload/635533672969701250_NiveshDaily%20-%203%20December%202014.pdf