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Fourth Bi-monthly Monetary Policy Statement, 2014-15
In line with the market expectations and also in line with our expectation, the Reserve
Bank of India (RBI) maintained status-quo and it kept the repo rate unchanged at
8.00% in its fourth 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);
reduce the liquidity provided under the export credit refinance (ECR) facility
from 32% of eligible export credit outstanding to 15% with effect from October
10, 2014;
continue to provide liquidity under overnight repos at 0.25% of bank-wise
NDTL at the LAF repor 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%.
Policy Stance and Rationale:
Inflation has been the driving factor in the policy rationale now. The RBI while
maintaining its focus on the 8% CPI inflation target for January ’15 is now also
looking at its medium term target of 6% by January ’16. However, RBI appears
relatively hawkish in its inflation outlook. Beyond the near-term moderation
due to base effects, it expects inflation to head back to 8% in the Q4FY15 with
Consumer Price Index (CPI) inflation at 7% in the Q4FY16, nearly 100 bps
above its stated target.
The RBI has retained its GDP projection at 5.5% for FY15 but also cautioned
that this can be achieved only if the investment climate changes and stalled
projects revive in conjunction with fiscal consolidation.
RBI reduced the liquidity provided under the export credit refinance (ECR)
facility from 32% of the outstanding export credit eligible to 15%. This will be
in effect from October 10, 2014. The refinance is aimed at encouraging banks
to provide finance to exporters. The ECR is repayable on demand or on the
expiry of fixed periods not exceeding 180 days. It is available at the repo rate.
Our Take: It was a part of exercise to move away from sector-specific
refinance towards a more generalized provision of system liquidity
without preferential access to any particular sector or entity.
Other Important Announcements:
With a view to easing operational conditions for hedging of foreign exchange
risk by market participants, it has been decided to increase the eligible limit
for importers under the past performance route to 100% from the existing
50%. This will provide a boost to imports.
It has been announced that government securities held by banks up to another
5% of their NDTL within the mandatory SLR requirement would qualify as
level 1 HQLA (High Quality Liquid Assets) as per the Liquidity Coverage Ratio
(LCR) stipulations. This is a positive move for the banks as the securities held
to meet LCR were outside the SLR obligation prior to this announcement.
The policy document has also detailed a road map for bringing down the
ceiling on the banks’ mandatory bond holding (SLR) under the so-called held
to maturity or HTM segment from 24% of NDTL to 22% in a gradual manner.
RBI wants to bring down the HTM limit to 22% in four stages over the next
one year. It is a move in a direction to develop the government securities
market and enhance liquidity in the banking system.
The fifth bi-monthly monetary policy statement is scheduled on Tuesday, December
02, 2014.
Conclusion:
The policy has come as per expectations. So, there should not be any reaction from
the market to the status quo in the policy. The central bank also kept CRR and SLR
unchanged. RBI is reasonably confident of achieving the 8.0% inflation target by
January 2015 but there is an upside risk towards its medium term target of 6.0% by
January 2016.
While there could be an upside risk to CPI numbers, we believe that the headline
CPI number and the core CPI number will remain reasonably on the softer side but
it will not be near to RBI’s medium term target of 6.0% by January 2016. However,
upward threats to food inflation continue to persist given the uneven monsoon.
This rules out any rate cut in near future.
RBI’s framework puts greater weight on policy stability and positive real rates. RBI
is likely to remain on a prolonged pause for now to ensure that disinflation continues.
Overall, we expect a status-quo position on interest rates in the next policy
announcement.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
-->
Fourth Bi-monthly Monetary Policy Statement, 2014-15
In line with the market expectations and also in line with our expectation, the Reserve
Bank of India (RBI) maintained status-quo and it kept the repo rate unchanged at
8.00% in its fourth 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);
reduce the liquidity provided under the export credit refinance (ECR) facility
from 32% of eligible export credit outstanding to 15% with effect from October
10, 2014;
continue to provide liquidity under overnight repos at 0.25% of bank-wise
NDTL at the LAF repor 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%.
Policy Stance and Rationale:
Inflation has been the driving factor in the policy rationale now. The RBI while
maintaining its focus on the 8% CPI inflation target for January ’15 is now also
looking at its medium term target of 6% by January ’16. However, RBI appears
relatively hawkish in its inflation outlook. Beyond the near-term moderation
due to base effects, it expects inflation to head back to 8% in the Q4FY15 with
Consumer Price Index (CPI) inflation at 7% in the Q4FY16, nearly 100 bps
above its stated target.
The RBI has retained its GDP projection at 5.5% for FY15 but also cautioned
that this can be achieved only if the investment climate changes and stalled
projects revive in conjunction with fiscal consolidation.
RBI reduced the liquidity provided under the export credit refinance (ECR)
facility from 32% of the outstanding export credit eligible to 15%. This will be
in effect from October 10, 2014. The refinance is aimed at encouraging banks
to provide finance to exporters. The ECR is repayable on demand or on the
expiry of fixed periods not exceeding 180 days. It is available at the repo rate.
Our Take: It was a part of exercise to move away from sector-specific
refinance towards a more generalized provision of system liquidity
without preferential access to any particular sector or entity.
Other Important Announcements:
With a view to easing operational conditions for hedging of foreign exchange
risk by market participants, it has been decided to increase the eligible limit
for importers under the past performance route to 100% from the existing
50%. This will provide a boost to imports.
It has been announced that government securities held by banks up to another
5% of their NDTL within the mandatory SLR requirement would qualify as
level 1 HQLA (High Quality Liquid Assets) as per the Liquidity Coverage Ratio
(LCR) stipulations. This is a positive move for the banks as the securities held
to meet LCR were outside the SLR obligation prior to this announcement.
The policy document has also detailed a road map for bringing down the
ceiling on the banks’ mandatory bond holding (SLR) under the so-called held
to maturity or HTM segment from 24% of NDTL to 22% in a gradual manner.
RBI wants to bring down the HTM limit to 22% in four stages over the next
one year. It is a move in a direction to develop the government securities
market and enhance liquidity in the banking system.
The fifth bi-monthly monetary policy statement is scheduled on Tuesday, December
02, 2014.
Conclusion:
The policy has come as per expectations. So, there should not be any reaction from
the market to the status quo in the policy. The central bank also kept CRR and SLR
unchanged. RBI is reasonably confident of achieving the 8.0% inflation target by
January 2015 but there is an upside risk towards its medium term target of 6.0% by
January 2016.
While there could be an upside risk to CPI numbers, we believe that the headline
CPI number and the core CPI number will remain reasonably on the softer side but
it will not be near to RBI’s medium term target of 6.0% by January 2016. However,
upward threats to food inflation continue to persist given the uneven monsoon.
This rules out any rate cut in near future.
RBI’s framework puts greater weight on policy stability and positive real rates. RBI
is likely to remain on a prolonged pause for now to ensure that disinflation continues.
Overall, we expect a status-quo position on interest rates in the next policy
announcement.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LINK
http://www.indianivesh.in/Admin/Upload/635477497679893750_NiveshDaily%20-%201%20October%202014.pdf
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