By Research Desk
about 10 years ago


By Ruma Dubey

This time around, the surprise was that there was no surprise!

The RBI Governor, Raghuram Rajan for once did exactly what we all had expected – kept a status quo, did not change any rates. Thus it kept the repo rate unchanged at 8%, CRR remains at 4%. Consequently, the reverse repo rate under the LAF will remain unchanged at 7% and the marginal standing facility (MSF) rate and the Bank Rate at 9%.

What he did do was increase the liquidity provided under 7-day and 14-day term repos from 0.5% of NDTL of the banking system to 0.75%, and decrease the liquidity provided under overnight repos under the LAF from 0.5% of bank-wise NDTL to 0.25% with immediate effect.

Policy remains data driven and it will continue to do so in the months to come. The current policy stance was based on the fact industrial activity continues to remain sluggish, the uncertain monsoon outlook for 2014, prices of fruit, milk and products starting to firm up, steady oil prices, sustained inflows in the form of portfolio flows, foreign direct investment (FDI) and external commercial borrowings, repayments by PSU oil marketing companies of their foreign currency obligations to the Reserve Bank during March leading to an increase in reserves, falling exports though comfortable Current Account deficit, which the RBI expects to be at 2% of the GDP at end of FY14.

What does come forth from this entire policy about today is that he is welcoming FIIs with fully open doors, with the easing in foreign currency markets rules for them and allowing them to hedge even bonds, though, rightly so, keeping the door closed on T-notes which have maturity above one year.

It has also become amply clear that the Governor is very keen on pushing through the new banking licenses and did the right thing by asking for the g-ahead from the EC, which is expected to give its verdict on the same today.

Looking ahead, it would be too early to start predicting what RBI would do in its next policy as it will continue to be data driven – with monsoon predictions to rule all decisions as it will directly affect inflation. Yet, it we were to read the writing on the wall, rate cuts are not seen anywhere on the horizon; lets only hope that no more rate hikes come in. If inflation soars and monsoon fails, well, a rate hike would be inevitable.

For now, lets just wait and get over the elections and look skywards for monsoon. Lets hope and pray we get a stable, ideally a majority Govt at the Center and monsoon does not plat rookie this year based on the predicted El Nino effect.

The stock markets have pretty much moved on. It is happy that there are no suprises and remains stable. For the markets, it would the announcement of the banking license and then the election outcome which matters the most. Till then, eveything else will be a minor blip or sparkle.

A quick look at the RBI policy stance and rationale based on this data:

  • RBI’s policy stance will be firmly focussed on keeping the economy on a disinflationary glide path
  • CPI Inflation target – 8%by January 2015 and 6% by January 2016
  • If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture.
  • Real GDP growth is projected to pick up from a little below 5% in 2013-14 to a range of 5 to 6% in 2014-15 albeit with downside risks to the central estimate of 5.5%.
  • Easing of domestic supply bottlenecks and progress on the implementation of stalled projects already cleared should brighten up the growth outlook
  • Expect better export growth as world economies pick up
  • Reduce access to overnight repos under the LAF while compensating fully with a commensurate expansion of the market’s access to term repos from the Reserve Bank - primary objective is to improve the transmission of policy impulses across the interest rate spectrum.
  • Banking License – RBI will announce in-­principle approval for new licences after consulting with the Election Commission. Immediately afterwards, the RBI will start working on the framework for on-tap licensing as well as differentiated bank licences.
  • RBI is also open to banking mergers, provided competition and stability are not compromised.
  • Asset quality - extended the transitional period for full implementation of Basel III Capital Regulations up to March 31, 2019, instead of as on March 31, 2018. This will also align full implementation of Basel III in India closer to the internationally agreed date of January 1, 2019.
  • Inflation Indexed National Saving Securities (IINSSs) for retail investors were issued in December 2013.
  • Modalities for allowing FIIs to hedge their currency risk by using exchange traded currency futures in the domestic exchanges are being finalised in consultation with SEBI.
  • RBI to enhance hedging facilities for foreign investors in debt instruments and it proposed to allow them to hedge the coupon receipts falling due during the next 12 months.
  • Rebooking of cancelled contracts in case of contracted exposures has been fully restored.
  • To allow all resident individuals, firms and companies with actual foreign exchange exposures to book foreign exchange derivative contracts up to US$ 250,000 on declaration, subject to certain conditions.
  • Revised regulations under Foreign Exchange Management Act (FEMA) for a simplified foreign portfolio investor (FPI) regime have been notified in March 2014.
  • To simplify the know-your-customer (KYC) procedures for opening bank accounts by FPIs. 
  • Investments by FPIs in G-Secs shall henceforth be permitted only in dated securities of residual maturity of one year and above, and existing investment in Treasury Bills will be allowed to taper off on maturity/sale. The overall limit for FPI investment in G-Secs will, however, remain unchanged at US$ 30 billion, so the investment limits vacated at the shorter end will be available at longer maturities.
  • FDI - to withdraw all the existing guidelines relating to valuation in case of any acquisition/sale of shares and accordingly, such transactions will henceforth be based on acceptable market practices.
  • The second bi-monthly monetary policy statement is scheduled on Tuesday, June 3, 2014.



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