RBI ADOPTS A NEUTRAL STANCE - ALL EYES ON NEW DATA AND BUDGET

By Ruma Dubey

This was probably the most neutral RBI policy ever, with no guidance, no rate change, no change anywhere. The only change – it cut SLR rate by 50 bps to 21.5%,  which would really have no real impact on the banks. The strong message which we got was that RBI is jittery about the Indian rupee and has put in place a few clauses to ensure that this is protected. In this policy, interest rates apart, there is a lot of liberalization w.r.to foex movement and restructuring bad loans.

This status quo does not really come as a surprise as RBI has not any good data since 15^th Jan and with nothing new to work on, this neutral stance was expected. Clearly, all further action from the RBI will be data driven. b

A quick look at the highlights of the policy:

• Kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.75%,
• Kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL);
• Reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 bps from 22% to 21.5% of their NDTL with effect from the fortnight beginning February 7, 2015;
• Replaced the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7, 2015;
• To continue to provide liquidity under overnight repos of 0.25% of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system through auctions;
• To continue with daily variable rate term repo and reverse repo auctions to smooth liquidity.
• No guidance given in terms of how RBI hopes to move in the days ahead.
• Reverse repo rate under the LAF will remain unchanged at 6.75% and the marginal standing facility (MSF) rate and the Bank Rate at 8.75%.
• Inflation is likely to be around the target level of 6% by January 2016. As regards the path of inflation in 2015-16, RBI to monitor the revision in the CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements.
• Baseline projection for growth using the old GDP base has been retained at 5.5% for FY15. The revised GDP statistics (base 2011-12) released on January 30 along with advance estimates for 2014-15 expected on February 9, 2015 will need to be carefully analysed and could result in revisions to the Reserve Bank’s growth projections for 2015-16.
• Enhanced limit for foreign exchange remittances under the Liberalised Remittance Scheme (LRS) to US$250,000 per person per year.
• Investment limit in Government securities by foreign portfolio investors (FPIs), registered with the Securities and Exchange Board of India (SEBI) is currently capped at US$ 30 billion of which US$5 billion is reserved for long term investors. The limit on investment in Government securities is now fully utilised. As a measure to incentivise long term investors, it has been decided in consultation with Government to enable reinvestment of coupons in Government securities even when the existing limits are fully utilised.
• All future investment by FPIs in the debt market in India will be required to be made with a minimum residual maturity of three years.
• For large projects which have failed to meet the envisaged date of commencement of commercial operations (DCCO), RBI to provide further flexibility by allowing a further extension of the DCCO of such projects where a change of ownership takes place, without adversely affecting the asset classification of loans to such projects, subject to certain conditions.
• RBI to allow non-callable deposits. Callability in a deposit will then be a distinguishing feature for offering differential rates on interest on deposits.
• 72 applications for Small Finance Banks and 41 applications for Payments Banks were received up to the deadline for submission yesterday. This number excludes applications that might have been received at other venues. As stated in the guidelines, two External Advisory Committees (EACs) will evaluate the applications received for setting up of small finance and payments banks and thereafter make their recommendations to the RBI.
• The first bi-monthly monetary policy statement for fiscal year 2015-16 is scheduled on Tuesday, April 7, 2015.

New GDP numbers will come in February 9^th and then the Union Budget on 28^th Feb. Thus we now adopt a wait-and-watch policy seeing how the new base year data pans out and what the Budget has in store. Once again, if data is good and situation demands, the Governor, as he has indicated earlier, will not wait for a policy date to announce a rate cut.

For now, let’s wait and watch the new economic data coming in and then the Union Budget.