RBI may reverse policy stance by lowering repo rate: CARE

As was expected, the Reserve Bank of India decided to keep interest rates unchanged at the credit policy announcement today. Consequently, in line with CARE’s own expectation, the repo rate stands unmoved at 8%. While, the case for a rate cut was compelling, the RBI has admittedly looked through the encouragingly low inflation figures emanating from the high base effect from last year to take a more cautious approach. The guiding factor has been that once rates are changed in a particular direction, it cannot be reversed immediately and therefore, the future path of inflation is also important.

Repo rate under the Liquidity Adjustment Facility (LAF) left unchanged at 8.00%.

Accordingly, the reverse repo stands 100 basis points lower at 7.00% and the Marginal Standing Facility (MSF) rate and Bank rate stand 100 basis points above the repo rate at 9.00%.

Cash Reserve Ratio (CRR) kept constant at 4.00% of Net Demand and Time Liabilities (NDTL) of the banking system.

Continue providing liquidity under overnight repos at 0.25% of NDTL at the LAF repo rate and under the 7-day, 14-day term repos of up to 0.75% of NDTL of the banking system through auctions.

Continue with daily one-day term repos and reverse repos.

CARE’s View1. RBI’s monetary policy is overtly driven by inflation. With all other forces such as growth, liquidity etc, making the case for rate cut strong, the RBI maintained a status-quo on account possible resurgence in inflation from December onwards

2. The GSec yields are more reflective of liquidity conditions and the 10-years paper has already gone below 8% - the repo rate. This trend will continue as long as there is excess liquidity in the system. The RBI is also likely to get more aggressive with OMO sales to take out excess liquidity.

3. The exchange rate will continue to be driven by external factors such as Fed action, strength of the dollar and oil prices. The RBI will be monitoring these movements as the decision on interest rates will also be linked to this factor.

4. We expect RBI to reverse its policy stance by lowering the repo rate in the next policy in February 2015 and start reducing the repo rate by 25 bps to begin with.

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