First Quarter Policy Review - 2012-13
In the First Quarter Policy Review the Reserve Bank of India (RBI) has left key policy rates unchanged. However, it has cut the Statutory Liquidity Ratio (SLR) to 23% from 24% earlier.
RBI said that "The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term. While monetary actions over the past two years may have contributed to the growth slowdown several other factors also have played a significant role. In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth. As the multiple constraints to growth are addressed, the RBI will stand ready to act appropriately. Meanwhile, managing liquidity within the comfort zone remains an objective and the RBI will respond to liquidity pressures, including by way of OMOs."
On the basis of the assessment of current economic situation, the Reserve Bank announces the following policy measures.
Monetary and Liquidity Measures:
Ø Cash Reserve Ratio (CRR): Retained at 4.75%
Ø Repo Rate: Retained at 8.0%.
Ø Reverse Repo Rate: Stands 100 bps lower to Repo rate at 7.0%.
Ø Bank Rate: Retained at 9.0%.
Ø Statutory Liquidity Ratio: Reduced to 23% from 24% for the Scheduled Commercial Banks with effect from the fortnight beginning August 11, 2012.
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Domestic Outlook and Projections:
Growth:
In the April Policy, the RBI had projected GDP growth for 2012-13 at 7.3% on the assumption of a normal monsoon and improvement in industrial activity. Both these assumptions did not hold. The greater integration of the Indian economy with the global economy, have an adverse impact on growth, particularly in industry and the services sector. On the basis of the global & Domestic factors the growth projection for 2012-13 is revised downwards from 7.3% to 6.5%.
Inflation:
In the April Policy, the RBI made a baseline projection of WPI inflation for March 2013 of 6.5%. This was based, on an assumption of normal monsoon. The deficient and uneven monsoon performance so far will have an adverse impact on food inflation. Notwithstanding some moderation, international crude oil prices remain elevated. This, coupled with the pass-through of rupee depreciation to import prices, continues to put upward pressure on domestic fuel price inflation. Keeping in view the recent trends in food inflation, trends in global commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2013 is now raised from 6.5%, as set out in the April Policy, to 7.0%.
Expected Outcomes
The policy actions taken are expected to anchor inflation expectations based on the commitment of monetary policy to inflation control; and maintain liquidity to facilitate smooth flow of credit to productive sectors to support growth.
RBI, lowering of SLR could bring down market interest rates as it would release close to Rs. 55,000 crores into the system. This would release the funds for private sector where interest rates could ease at least for the top rated companies and it would also improve the profitability of banks by almost 1%.
Our View:
From RBI`s policy statement it is clear that RBI will wait for the government to take decisive steps like fuel prices hike to bring down the fiscal deficit and look for signs of a sustainable moderation in inflation before re-initiating the rate cutting cycle. We are currently expecting a total of 50bp in cuts to the repo rate in current fiscal.
The bond yields surged to 8.22 -23 % levels reacting to the reduced demand for the government securities because of RBI`s SLR cut. Also lower than normal rain will also increase possibility of fiscal slippage which is not so good for yields. Given all these factors, bonds markets dependence on the RBI`s OMO's is very high to absorb the supply of Rs. 15,000 cr ($ 2.5-3 bn) week on week. Taking into consideration all these domestic and global economic developments it is expected that 10 year GOI yields will be range bound between 8.20 to 8.40% till the time there is more clarity on the RBI`s stance on the OMOs.
The next Mid-Quarter Review of Monetary Policy for 2012-13 will be put out through a press release on Monday, September 17, 2012.
