RBI's status quo on optimistic CPI inflation nos: Angel

Angel's statement on RBI Bi-Monthly Monetary Policy Statement

The RBI (Reserve Bank of India) in its third Bi-Monthly Monetary Policy review on 5th August 2014 maintained its status quo by keeping the repo and reverse repo rate unchanged at 8 percent and 7 percent respectively. The central bank also kept Cash Reserve Ratio (CRR) unchanged at 4 percent. RBI reduced the Statutory Liquidity Ratio (SLR) for second consecutive time in its meeting today for scheduled commercial banks by 50 basis points (bps) from 22.5 percent to 22 percent of Net Demand and Time Liability (NDTL) with effect from the fortnight beginning on 9th August 2014. RBI will continue to provide term repo facility of 0.25 percent of NDTL to compensate fully for the reduction in access of liquidity. Additionally, central bank continued with provisions of providing liquidity less than 7 days and 14 days term repos of up to 0.75 percent of NDTL. The reserve repo rate under the Liquidity Adjustment Facility (LAF) remained unchanged at 7 percent and Marginal Standing Facility (MSF) rate and bank rate at 9 percent respectively. In order to enable greater participation from banks in financial markets, the ceiling for held to maturity (HTM) has been brought down to 24 percent from 24.5 percent of NDTL with effect from fortnight beginning 9th August 2014.

The central bank stated that global economic activity has been picking up at modest speed after sharp slowdown in first quarter of the current year. Risk appetite of investors has kept financial markets up mainly drawing strength from assurances of continuing monetary policy support in industrial countries. Foreign funds inflows in Emerging Market Economies (EMEs) have grown strongly in recent months. However, are vulnerable to changes in investor risk appetite which is mainly driven by reassessment of future path of US monetary policy if any or possibility of escalation of geopolitical tensions.

Markets needs to keep an eye on inflation in coming months and if any reforms taken by RBI

"The Indian Rupee in expected to trade on a mixed note in the near future. This is mainly on account of constant inflow of foreign funds in equity and debt markets which will support an upside in the currency. Further, estimates of optimistic industrial and manufacturing output from the country will act as a positive factor. Forecast for plunge in both wholesale and retail inflation data will continue with positive movement in the Indian Rupee.

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However, sharp downside in the currency may be cushioned due to dollar demand from state run banks on behalf of importers, corporate firms and defence related payments. Further, gains in the currency will be limited due to intervention by the RBI in spot market and buying dollars to prevent further appreciation in the Rupee."

"Over the near term, markets need to adopt a wait and watch policy and monitor the inflation data in coming months and reforms taken by the central bank if any. The next Bi-Monthly policy meeting is scheduled on Tuesday, 30th September 2014, says Angel Commodities.

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