RBI Mid-Quarter Monetary Policy Review.

Mid-Quarter Monetary Policy Review.

 

Status quo on repo rate and CRR, SLR reduced by 100 bps

Key highlights

Maintains key policy rates (Repo: 8.0%, Reverse Repo: 7.0% and MSF: 9.0%) and CRR (4.75%) at the same level

 

SLR reduced by 100 bps from 24% to 23% of banks’ NDTL

 

Monetary policy maintains status quo: The Reserve Bank of India (RBI) in its First Quarter Review of the Monetary Policy FY2013 kept key policy rates unchanged largely in line with market expectations. The RBI has maintained repo rate at 8%. Subsequently, the reverse repo rate and MSF remain unchanged at 7% and 9%. The CRR has also remained unchanged at 4.75%. The RBI slashed the SLR by 100 bps to stand at to 23%.

Market expectations of no rate cuts in the monetary policy were based on sticky inflation data with Wholesale Price Index (WPI) headline inflation continuing to read above 7% in the past five months and double-digit Consumer Price Index (CPI) for the month of June, 2012.

The RBI attributes elevated level of inflation to the a) increase in food prices, b) increase in input costs, and c) upward revision in prices of some administered items such as coal. Coupled with these factors, we believe upside risks to inflation will persist in the medium-term due to supply-side constraints, revision of MSP prices of kharif crops and the impending hike in diesel prices.

Revision in growth and inflation outlook: The RBI revised its baseline projection of growth and inflation in its review of the monetary policy. As expected the growth projection for real GDP growth during FY13 has been revised downwards from 7.3% to 6.5%. Taking in view the recent trends in food inflation, global commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2013 has been revised from 6.5% to 7.0%. In fact, in the coming months, RBI expects WPI inflation to inch up to 8% and therefore a meaningful change in the monetary policy stance is unlikely until December 2012.

The downward revision of growth estimates was expected mainly due to a slowdown in industrial activity in addition to deterioration in macro economic fundamentals of the economy. However, slowdown of growth rate is not a key concern since the post-crisis trend growth rate, as per the RBI, has also dropped to 7.5% thereby reducing the output gap. The upward revision of inflation from 6.5% and 7% for FY13 clearly highlights that inflation will dominate the major concern area of the economy and monetary policy stance will be determined by the growth-inflation dynamics in the economy.