RBI Maintains A Status Quo

This was the first time that the RBI Governor had no chance to give a surprise in terms of repo rates. Actually the scenario was such that everyone on the street was quite confident that Dr. Rajan would not tinker with key interest rates this time around. And In line with street expectations, the RBI left repo rate unchanged at 8.0%. 

However certain other announcements were made in regards to SLR and NDTL. To be specific, SLR was reduced by 50 bps to 22.0% of NDTL along with a 50 bps reduction in the HTM ceiling for banks to 24.0% of NDTL. We are of the opinion that in a scenario where liquidity is needed to drive the growth, this was provided through the SLR being cut. Monetary policy status quo was driven by the expectation of CPI inflation moving towards the immediate glide path target of 8% in Jan-15 with risks remaining balanced. The approach on liquidity was guided by the objective of fine-tuning the existing framework, ensuring adequate flow of credit to support recovery in growth, and facilitate banks preparedness for the Basel III LCR framework within the wider ambit of fiscal consolidation. 

While, the RBI seems fairly confident of achieving the Jan-15 CPI inflation target of 8%, it has for the first time highlighted upside risks for its January 2016 CPI inflation target of 6%. We are of the opinion that, this will continue to prompt the RBI to keep repo rate unchanged at 8% for the rest of FY15

Going forward, we expect improvement in the growth-inflation balance driven by complementary policy support from the government in the area of food management and facilitation of project clearances to create room for monetary easing in H1FY16. All in all we do not expect RBI to reduce the rates at least in near term.