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Third Bi-Monthly Monetary Policy 2014 – 15
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RBI released the third bi-monthly review of the Monetary Policy for 2014-15 on 05th Aug, 2014. The highlights of the policy review are:
- The key Repo Rate (RR) rate under the Liquidity Adjustment Facility (LAF) was kept unchanged 8.00%. As a result, the Reverse Repo Rate (RRR) and the Marginal Standing Facility (MSF) rate stand unchanged at 7.00%, and 9.00% respectively.
- Bank Rate will be same as MSF rate at 9.00%.
- Cash Reserve Ratio kept unchanged at 4.00%
- Statutory Liquidity Ratio was slashed by 50 bps to 22% of NDTL. RBI also reduced the ceiling on HTM (Held-to Maturity) on SLR portfolio by 50 bps to 24%.
- Cap on overnight LAF repo borrowing was maintained at 0.25% on NDTL and the 0.75% of NDTL for 7-day and 14-day term repo.
Considerations and Policy Stance
- RBI cited increased risks to the CPI inflation target of 8% by Jan 2015. However RBI felt that the overall risks remained more or less balanced.
- RBI mentioned that the liquidity position remained stable and the prospects of a renewal in growth have improved modestly.
Analysis
RBI’s policy stance was hawkish as it highlighted the upside risks to inflation. It can be implied from the policy statement that we will have to wait till end of 2015 before we can expect any positive action on interest rates.
RBI has once again slashed the SLR rate by 50 bp with the expectation that increase in liquidity will lead to expansion of bank credit. However, despite similar reduction in SLR in June 2014, there was no reduction in banks’ investment in G-sec, with investment deposit ratio continuing at around 28.91. Going by the rend banks are most likely to stay invested in the G-secs, despite lower SLR requirement. The Governor too has acknowledged this in the post policy press conference and stated that the SLR cut is in line with the long-term object of the RBI to make more liquidity available and he does not see any immediate impact on Banks investment in g-secs.
We see the unexpectedly hawkish tone of the monetary policy having a negative impact on the stock, bond and rupee.
- Aniket More
(Consultant – Strategic Advisory Services)
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