The RBI has released the Governor, Mr. Y V Reddy’s statement on the quarterly review of the monetary policy today. Given below is the note that i wrote to clients immediately after the policy announcement reproduced verbatim
Policy Stance
The monetary policy stance of the central bank strives
- To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum.
- To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion.
- To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and the growth momentum.
This statement of the monetary policy stance is identical to the statement of the January policy review.
Policy Action & Monetary Measures
In line with the policy stance, the following monetary measures have been taken
- No change in the bank rate which is currently 6%. No change in CRR, which remains at 6.5%.
- No change in the daily reverse repo rate, the rate at which banks lend to RBI, which has been kept unchanged at 6%.
- No change in the daily repo rate, the rate at which banks lend to RBI, which has been kept unchanged at 7.75%.
In addition, the estimate for GDP growth for the current fiscal has been revised to around 8.5% from the earlier 8.5%-9.0% projected in the. Significantly the inflation target of 5% - 5.5% has been replaced with a target of 4%-4.5%.
Comments
The central bank has released a policy statement that seems to be more benign than the statement accompanying the previous policy review in January.
Significantly, the Governor has opted for no change in the policy rates and the cash reserve ratio.
This is mildly bullish for the bond markets as some market participants had expected a hike in at least one of the policy rates.
More important elements of the policy statement figure elsewhere. Of special import is the central bank’s view on the tolerance level for inflation. Significantly, the downward revision in the inflation target seems to suggest reduced tolerance to inflation.
Among other steps announced by the RBI, many are targeted towards easing conditions for money flow out of the country. This is clearly intended to counter the large capital inflows that we have been witnessing. The facilitation of outflows is intended to counter the large forex inflows being witnessed. Measures announced include
- Overseas investment limit (total financial commitments) for Indian companies enhanced to 300 per cent of their net worth.
- Listed Indian companies limit for portfolio investment abroad in listed overseas companies enhanced to 35 per cent of net worth.
- Aggregate ceiling on overseas investment by mutual funds enhanced to US $ 4 billion.
- Prepayment of external commercial borrowings (ECBs) without prior Reseve Bank approval increased to US $ 400 million.
- Present limit for individuals for any permitted current or capital account transaction increased from US $ 50,000 to US $ 100,000 per financial year in the liberalised remittance scheme.
- Ceiling interest rate on FCNR(B) and NR(E)RA deposits reduced by 50 basis points
Amongst other significant announcements, the permission to banks and primary dealers to trade in single entity credit default swaps is a welcome step. Hopefully, this should bring some life to the hitherto moribund corporate bond market.
Setting up of a working group on currency futures is also a step in the right direction. We hope the working group would complete its assignment in double quick time to enable the introduction of this instrument in the domestic markets with alacrity.
Similarly a working group has also been proposed to be set up to work on the interest rate futures market which has failed to take off ostensibly due to deficiencies in product design and certain policy restrictions.
Risk weights on residential housing loans to individuals for loans upto INR 2 mn has been reduced temporarily to 50%. This move seems to have been taken under guidance from the finance ministry.
The interest rate ceiling on NBFC deposits has been raised by 150 basis points to 12.5% p.a. This is in line with the enhanced interest rates on comparable investments.
Finally, the no rate hike seen today means that the chances of a rate hike in the next policy review seem enhanced. This is especially so since the tolerance levels on inflation are now reduced to a great extent.