Second Quarter Review of Monetary Policy

The Reserve Bank of India (RBI) has come out with its Second Quarter Monetary Policy review, wherein the policy stance of this meet is in line with the general consensus. 

• The RBI has increased the Repo Rate by 25bps to 7.75% accordingly, Reverse Repo Rate under the Liquidity Adjustment Facility (LAF) determined with a spread of 100 basis points below the repo rate, stands adjusted to 6.75%. 
• However, RBI has reduced the Marginal Standing Facility (MSF) by 25bps to 8.75%. With these changes, the MSF rate and the Bank Rate are recalibrated to 100bps above the repo rate, accordingly, Bank Rate stands adjusted to 8.75%. 
• Cash Reserve Ratio remained unchanged at 4%.
• Statutory Liquidity Ratio unchanged at 23%
• Liquidity available under term repos of 7-day and 14-day tenor increased from 0.25% to 0.50% of NDTL of banks.
• GDP growth forecast of 5.00% for 2013-14
• WPI Inflation likely to remain higher than current levels for rest of the year
• Retail Inflation (CPI) likely to remain around or above 9%
• Normalcy in exchange market will be restored when oil dollar demand is fully returned to market
• Launch Inflation Indexed National Saving Securities (IINSSs) for retail investors in November/December 2013 in consultation with the Government of India.
• Issue guidelines on 10-year Interest Rate Futures by mid-November 2013 and product to be launched by end-December 2013

• Considerations and Policy Stance
• Delay in QE tapering helped capital flows to resume. However, headwinds to growth from domestic factors constrains continue to pose downside risk.
• Pass-through effect of rupee depreciation and ongoing adjustments in administered fuel prices are likely to keep inflation at elevated levels, demanding adjustment in Repo Rates.
• Industrial activity has weakened with signs of downturn in both consumption and investment demand. Strengthening export growth and stalled project clearances by Cabinet Committee on Investment may buoy investment and overall activity towards the close of the year.
• Though the foreign exchange market have calmed with trade deficit and CAD improving on account of exports growth and contraction in non-oil import demand, normalcy will be restored only when dollars demand from public sector oil marketing companies is fully returned to the market
• Monetary policy measures are intended to curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth