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Mid-quarter Monetary Policy review

June 19, 2013

Reserve Bank of India has maintained status quo on all the key rates in its Mid-quarter Monetary Policy.

Major moves:

  • Repo rate unchanged at 7.25%.
  • The Reverse repo rate unchanged at 6.25%.
  • CRR remains steady at 4%
  • The Marginal Standing Facility (MSF) rate is retained at 8.25%, mandated at 100bps higher than Repo rate.
  • The Bank rate stands at 8.25%

 RBI’s stance:

  • Domestic growth trend is subdued in the Indian economy on account of supply constraints, weak domestic demand, lackluster investment sentiments and infrastructure bottlenecks.
  • Globally, the risks remain elevated coming from tapering off of the quantitative easing by major global central banks. This stands to reduce global liquidity and risk appetite, thereby hurting capital flows into Indian equity markets.
  • Upside risks to Inflation persist on account of the release of suppressed inflation through revision in administered prices which includes Minimum support prices (MSP) and rupee depreciation.
  • RBI expects to monitor inflation trajectory (especially food inflation) and BoP situation and hope to address risks to growth through monetary easing only upon sustainable fall in the inflation.

 Our View

Despite the growth concerns, RBI sees some positive movements in the Current Account Deficit (CAD) through policy measures like imposing ban on gold imports. RBI is mindful of the urgent need for economic growth resurrection, though it doesn’t rule out the possibility of rate hikes if situation demands. A sporadic fall in inflation may not be the only parameter for RBI to cut rates going ahead. Government spending is improving and is expected to keep the systemic liquidity comfortable.

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