RBI’S CREDIT POLICY – 2nd December 2014

·         Repo Rate – The repo rate under the liquidity adjustment facility (LAF) has been retained unchanged at 8%.

·         Reverse repo rate & MSF – Consequently, the reverse repo rate under the LAF will remain unchanged at 7% with marginal standing facility (MSF) rate and the Bank Rate at 9%.

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

Key Takeaways from RBI policy

The RBI’s decision to keep the key policy rates unchanged is in line with our and market expectations. However, the policy stated that 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.  In his media briefing, Rajan suggested that once there is a change in policy stance then it shall persist and it does not want to flip flop the interest rate direction. RBI still finds some uncertainty about the durability of persistent low inflation and wants to confirm the low inflation trend for the longer period. Full outcome of the NE Monsoon will determine the intensity of price pressures relating to cereals, oilseeds and pulses, but it is reasonable to expect some firming up of these prices in view of the monsoon’s performance so far and the shortfall estimated for kharif production. Risks from imported inflation appear to be retreating, given the softening of international commodity prices, especially crude and reasonable stability in the foreign exchange market. Accordingly, the RBI has revised its internal CPI inflation forecast down from 8%  to 6 per cent for March 2015.

 

Outlook  

We believe the inflation is likely to remain at lower levels going ahead as crude and other commodity prices have fallen sharply. This shall negate the risk that the low base effect may again creep inflation upwards from next inflation reading. We believe that the rate cuts by RBI shall begin from the last quarter of the current financial year. Though the quantum of rate cuts shall be determined by the inflation data, fiscal deficit, current account deficit and rupee movement going ahead. G-sec bond rates have fallen by 50 bps+ post Q2FY15. Similarly the short term rates including CD/CP rates have fallen by ~50 bps. Thus, the borrowing cost for bank and the system interest rates is already trending south. Besides, RBI has announced that it may soon release the guideline for 5/25 structure for infrastructure projects and also increase the equity stake of banks in the stressed project for which pricing is being formulated. These guidelines may turn out to be positive for PSU banks as they have higher share of stressed projects. Overall the policy is neutral for banking sector but marginally positive for PSU banks- BOI, PNB, Canara Bank, BOB, SBI, etc.