RBI stays the course on interest rates, repo at 8%

Apex bank prefers to wait and watch

 In a largely expected move, the Reserve Bank of India maintained status quo in its fourth bimonthly monetary policy. India's central bank kept repo rate unchanged at 8 per cent while CRR was maintained at 4 per cent. Reverse repo rate and SLR rates were also kept unchanged.

In the policy announced today, RBI said that it targeting an inflation of 6 per cent by January 2016. "We are currently positioned to reach 6 per cent by January 2016. There are many disinflationary forces underway including relatively stable exchange rate, low oil prices. Evolution of food inflation over next one year is an uncertainty," RBI Governor Raghuram Rajan said. Risks to inflation projections have come down as compared to August policy, he said, adding that we are currently appropriately positioned to reach inflationary targets.

The apex bank seemed confident of achieving its 8 per cent inflation target for January 2015. With consumer price index (CPI) inflation easing from its recent peak of 11.2 per cent in November 2013, the near term outlook for inflation has improved and the target of 8 per cent for January 2015 appears more within reach now than at the time of the first bimonthly monetary policy statement in April, RBI said.


Scope for reduction

Asked on whether RBI was looking to cut SLR, Rajan said that there is definitely scope for reduction. “Banks are sitting on plenty of liquid securities. As govt finances improve, we will steadily bring SLR down, it will be a measured process," Rajan said. 

RBI, in order to further develop government securities market and enhance liquidity, decided to bring down the ceiling on SLR securities under the HTM category from 24 per cent of NDTL to 22 per cent in phases starting from the fortnight beginning January 10, 2015.

Hemal Doshi, Chief Currency Strategist, Geojit Comtrade Ltd, said that RBI Governor Raghuram Rajan was again seen doing a balancing act as RBI expects the near term objective of 8 per cent of headline inflation in January 2015 as highly achievable.

Liquidity provided under the export credit refinance (ECR) facility has been reduced to 15 per cent of eligible export credit outstanding from 32 per cent currently with effect from October 10. Industry players however feel that this is unlikely to have a major impact. “Cut in export refinance from 32 per cent to 15 per cent will not affect much as the system is having excess liquidity,” Bank of India CMD V R Iyer said.

RBI also increased the eligible limit for importers under the past performance route to 100 per cent from the existing 50 per cent. Importers can now hedge up to 100 per cent of the average of past three years’ import turnover or the preceding year’s import turnover, whichever is higher, subject to compliance with other conditions applicable for hedging under this route.

The central bank also said that it will issue policy guidelines for the Bharat Bill Payment System (BBPS), Trade Receivables Discounting System (TReDS) and standardisation of processes in mobile banking services by November-end.

Macro-economic outlook

Anis Chakravarty, Senior Director, Deloitte, said that RBI’s decision to maintain the status quo on policy rates was expected. “WPI eased sharply to 3.74 per cent in August 2014, but that was more because  of moderation in fuel prices and not  because of food inflation, which continued to be sticky.

CPI also came down only marginally to 7.8 per cent in August 2014, which means that retail inflation also continued to hover above the comfort levels. It appears that based on its assessment of macro-economic outlook and inflationary expectations, RBI has decided to continue with its wait and watch policy,” Charkravarty said.

Commenting on the policy, Angel Broking Chairman and Managing Director Dinesh Thakkar said, "We expect inflation to continue falling in the coming months due to benign global commodity prices on the one hand and the government’s focus to bring down food and wage inflation by avoiding inflationary impulses from sharp MSP price hikes etc., on the other. Hence, we expect that in the coming 6-12 months, we are headed for lower inflation, and therefore, interest rates."

Kotak said in a note to investors on Tuesday that going ahead, the risks would be for policy rate hikes in case the government’s actions do not complement the RBI’s stance.

HSBC wanted the govt to take more steps to lift growth and contain inflation. "The central bank remains concerned about upside risks to inflation, particularly from food. The ball is now in the government's court to deliver on structural reforms that will lift growth and contain inflation," HSBC said.