- Posted August 6, 2014 by
Credit Policy by Dr Raghuram Rajan has been received well by financial analysts
The RBI’s third bi monthly monetary policy maintained its growth outlook for the current fiscal at 5-6%. The governor kept the repo and reverse repo rate unchanged and reduced the SLR and HTM (Held to Maturity) by 50bps. Investors have also been assured of a better GDP this year and a probability of interest rates being slashed if disinflation continues.
The RBI governor Dr Raghuram Rajan, presented the third bi-monthly credit policy yesterday, which was hailed as balanced and promising by financial analysts. The repo rate remained unchanged at 8% as did the reverse repo rate at 7%. And the cash reserve ratio was also maintained at 4%. SLR was reduced to 22% from 22.50, which will now ensure the infusion of Rs 40000 crores into the financial system. HTM (Held to Maturity) was also reduced from 24.50% to 24%.
In his speech Mr Raghuram Rajan assured investors that GDP would perform better than last year and that there is room to cut interest rates in the near future if disinflation continues as expected. The governor was not concerned about the disappointing monsoons as he felt that a deficit in monsoons does not necessarily mean a deficit in Agriculture.
The RBI feels that the sentiment on domestic economic activity seems to be improving, with incoming data indicating a growth in Industries and Exports. Though the uneven distribution of monsoons along with its initial delay raised much concerns, these fears were later dispelled as monsoons picked up through much of the country in July.
RBI maintained its growth outlook for the current fiscal at 5-6%. With the revival of investment, unlocking of stalled projects, release of resources for private enterprises, improvement in external demand and stability in international crude prices, the real GDP growth of 5.5% that was estimated in the April projection of 2014-15 can be sustained. For overall economic growth, measures to ensure fiscal consolidation are crucial.
The bank feels that the implementation of the government policy actions should create a favorable environment for a marked improvement in domestic demand and supply conditions. However with the continuing uncertainty over the future course of the monsoons, the possibility of future food inflation and a consequent broader inflation cannot be ruled out.
After assessing the current and macroeconomic situation the RBI decided to continue providing liquidity under overnight repos at 0.25 per cent of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system. The bank commented about the liquidity conditions being broadly stable, barring sporadic occasions of tightness on account of movements in the cash balances of the government maintained with the RBI. The bank will review the existing liquidity arrangements and will continue to monitor the same to ensure adequate flow of credit to the productive sectors.
However on the downside, the bank also warned that adverse conditions in global recovery, monsoons and geo-political situations cannot be ruled out either. Dr Rajan also mentioned that the "Higher prices of vegetables, fruits and protein-based food items were offset by the muted increase in the prices of non-food items, particularly those of household requisites and transport and communication."
RBI spoke about the vulnerability of the emerging markets to global inflows and stated that portfolio flows to emerging markets have risen substantially. The global economic activity seems to be convalescing and has picked up since the Q1 performance. Investor risk appetite has resulted in impressive market performance, taking assurance from the continuing monetary policy support in Industrial countries.
Indian share markets saw an initial rally on the day of the presentation of the RBI policy. NIFTY went up to 7834, remained volatile during the presentation and then dipped.