RBI MONETARY
POLICY
With the backdrop of slowing
global growth, hazy oil prices, uncertain monsoon and domestic economy not
giving strong growth impulses, a cut was expected. Repo rate was cut 25 basis
points to 6% in the first bi-monthly monetary policy signally slowing domestic
growth overshadowed by global concerns. RBI maintained its neutral stance and
as a result, repercussions were flattish for the equity markets which had already
pencilled in the 25-basis cut but expected the central bank to turn over to
accommodative mode. The bond markets perceived the policy to be less dovish and
thus reacted with a 6-basis point rise for the benchmark 10-year bond to 7.34%.
Reserve Bank Of India has been impacted
by the recent democratization of the Indian Financial System. Kotak Mahindra’s petition
followed by judgement against RBI’s February 12 circular has underlined the
need of wider consultations with relevant stakeholders before important policy formulations.
Though Kotak Mahindra case in still in suspension mode, RBI has agreed to issue
fresh circular with respect to resolution of NPA mess. Fringed and flanked by such complex operative derivatives,
RBI has done its bit in the first bimonthly monetary policy by pushing for
growth as retail inflation at 2.6% and its revised GDP estimate of 7.2% called
for a repo rate cut. Coming to liquidity issues faced by the market, apart from
regular OMOs and the recent innovative rupee dollar swap tool, the central bank
has allowed an additional 2% of SLR to be counted as Level 1 High Quality
Liquid Assets for LCR computation for banks. This will not only harmonise
liquidity requirements of banks with LCR, but also release additional liquidity
for banks for lending purposes. Decision to link retail loan floating rates to external
benchmark and the activation of Countercyclical
Capital Buffer have been deferred. One of the major RBI announcements was with
respect to corporate loan secondary market. Reserve Bank will set up a
Task Force to recommend measures for developing robust secondary market for
corporate loans in India.
With general elections just round
the corner and effectiveness of Repo Rate arsenal already in question with
lower rate cuts transmitted to general public, the central bank is worried about growth as credit flows remain muted for
small, micro and medium enterprises, capacity utilization is low with weak
export growth and declining non gold non-oil imports. Though growth might improve
with new government formation in June and annual budget in July, another 25-basis
rate cut is already on the MPC table.
