TQR Monetary Policy

RBI is expected to announce its Third Quarter Review of Monetary Policy today 28th January 2014. Wide expectations of a status quo, i.e. Hold the Repo at 7.75%, with the Reverse Repo and MSF adjusting to 6.75% & and 8.75%.

Guv Rajan has been somewhat all over the place with initial hawkish stance (he hiked in his very first policy in Sep citing high CPI) and then status quo ever since (even though CPI spiked to 11% YoY in December). He also re – calibrated the MSF rate which Guv Subba had hike to over 300 bps over Repo citing currency volatility. With the currency stabilising ever since, Guv Rajan re – instated the MSF over 100 bps over Repo.

So far the 10 yr Benchmark has been hovering near the MSF so also the short term rates indicating that MSF being the operative rate. Market probably waiting for more data to get convinced that rates would come down secularly.

With core inflation rising in the previous readings, even though the headline rates came down driven by vegetables (the CPI i.e), ideally the RBI should be hawkish in its stance, if at all it doesnt hike rates by 25 bps.  

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