Second Bi – Monthly Review of Monetary Policy – Our take

RBI left the policy repo rate unchanged (leading to unchanged reverse repo and MSF). CRR was untouched. However it;

1. Cut SLR by 50 bps to 22.5 %.

2. Cut Liquidity under ECR to 32% of eligible export credit outstanding from the earlier 50%. However, introduced a special term repo facility of 0.25 % of NDTL.

RBI says, ” .. CPI headline inflation has risen on the back of a sharp increase in food prices. Some of this price pressure will continue into May, but it is  largely seasonal…. The risks to the central forecast of 8 per cent CPI inflation by January 2015  remain broadly balanced. Upside risks in the form of a sub-normal/delayed monsoon  on account of possible El Nino effects, geo-political tensions and their impact on fuel prices…”

Thus, the pause has been supported by reasons such as caution with respect to the rising CPI and uncertain monsoon and the need to let the disinflationary forces play out.

SLR cut has been effected so as to allow banks more headroom to extend credit owing to rising investment demand as the economy recovers. Since the system is currently excess SLR. Meaning, banks have hoarded more government / state paper than needed owing to lack of credit demand. Deposit growth still outpaces credit growth as there isnt enough demand from private corporates for credit. 

RBI provides an export credit refinance (ECR) facility to banks on the basis of banks’ eligible outstanding rupee export credit. ECR facility is available at the repo rate under the LAF. This is to enhance credit flows to the export sector. RBI says, “In pursuance of the Dr. Urjit R. Patel Committee’s recommendation to move away from sector-specific refinance towards a more generalised provision of system liquidity without preferential access to any particular sector or entity the Reserve Bank has decided to limit access to export credit refinance while compensating fully  with a commensurate expansion of the market’s access to liquidity through a special term repo facility from the Reserve Bank (equivalent to 0.25 per cent of NDTL)..”

With the bi – monthly review being on August 5, 2014, the trajectory of CPI and the development of monsoon would provide a clue in the future course of monetary policy. 

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