RBI's Credit Policy 30th July 2013

RBI’S CREDIT POLICY – 30^th July 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 10.25%.

·         GDP growth projections - The growth projection for 2013-14 has been revised downwards from 5.7% to 5.5%. The RBI said – “While the onset of the monsoon and its spread have been robust, the persisting weakness in industrial activity has heightened the risks to growth. Moreover, global growth has been tepid, with some signs of loss of momentum in the US and in EDEs on top of the ongoing contraction in the euro area. This has impacted world trade with consequent adverse spillovers on India’s exports, manufacturing and services. Without policy efforts to address the deterioration in productivity and competitiveness, the pressures from wage increases and upward revisions in administered prices could weaken growth even further and exacerbate inflation pressures”.  

 

Our Take

In line with market expectations, the RBI has kept all the key rates unchanged. Commenting on inflation the RBI said –“The sharp depreciation of the rupee since mid-May is expected to pass through in the months ahead to domestic fuel inflation as well as to non-food manufactured products inflation through its import content. Keeping in view the domestic demand-supply balance, the outlook for global commodity prices, and on the expectation that spatial and temporal distribution of the monsoon during the rest of the season will be normal, the Reserve Bank will endeavor to condition the evolution of inflation to a level of 5.0 per cent by March 2014, using all instruments at its command”.

The RBI has indicated that the measures taken off-late to restore stability to the foreign exchange market will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation. Going forward the RBI reinforced the need to institute structural measures to bring the CAD down to sustainable levels.

With the RBI’s monetary policy meet not throwing any negative surprise, investors will try to gauge the US Fed’s approach on tapering of QE at the FOMC meet and its likely impact on investor risk preference. RBI’s recent measures of increasing cost of incremental credit and interventions in the current market through dollar selling have just about maintained the rupee levels at a few bps below Rs 60 to the dollar and not really made a dent in reversing the trend of rupee depreciation. Thus, the combination of our structural current account deficit problems, which is not being dealt with head-on, and the lack of adequate capital inflows, let alone of stable nature, could again bring up concerns on the rupee front. Market volatility is likely to continue. We’d advise investors to continue to stick to defensives (FMCG, IT and pharma).