RBI's Credit Policy (17th June 2013)

RBI’S CREDIT POLICY – 17^th June 2013…All Key rates kept unchanged

· Cash Reserve Ratio – The cash reserve ratio (CRR) of scheduled banks has been retained unchanged at 4.0% of their net demand and time liabilities (NDTL).

· Repo Rate – The repo rate under the liquidity adjustment facility (LAF) has been retained unchanged at 7.25%.

· Reverse Repo, MSF rate & Bank rate – Consequently, the reverse repo rate under the LAF will remain unchanged at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25%.

Our Take

In line with market expectations, the RBI has kept all the key rates unchanged. Commenting on inflation the RBI said – “easing commodity prices at the global level and weaker pricing power of corporates at the domestic level are having a softening influence. Given that food inflation remains high, the inflation outlook will be influenced by concerted efforts to break food inflation persistence. The inflation outlook going forward will be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices (MSP) as well as the recent depreciation of the rupee”.

Commenting on guidance the RBI said – “The Reserve Bank’s monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead. It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth. While several measures have been taken to contain the current account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows. The Reserve Bank stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments”.

Overall we believe the policy action by the RBI to be neutral for the markets. From an equity market perspective, the markets might continue to be volatile due to global cues. We advise investors to use the short term weakness in the market to accumulate quality stocks in (1) sectors with visibility on growth – consumption and pharma, (2) interest rate sensitive like banking and auto, and (3) reform led sectors like oil & gas and media. For stock opportunity please refer to our report – “Buffetology- Be greedy when the market is fearful” sent on 14^th June.