Assocham: Fourth Bi-Monthly Monetary Policy

In line with expectations, the RBI kept Repo, CRR and SLR rates unchanged in its Fourth Bi-Monthly Monetary Policy. In the accompanying policy statement, three announcements assume importance:

• RBI has acknowledged upside risks to CPI inflation easing owing to softening of international crude prices and a relatively stable domestic currency. Amidst these forces, the 8% CPI target for Jan-15 appears achievable, supported by positive base effects. Importantly, RBI accorded greater weight to the next threshold of 6% by Jan-16. It sees upside risks to this threshold, which should warrant continuing with its policy preparedness to contain any inflationary pressures.

• Further, access to Export Credit Refinance (ECR) has been bought down to 15%, from 32% earlier. This is in line with the Urjit Patel Committee Report to move away from sector-specific refinance, with term repos assuming greater importance in RBI⦣8364;™s liquidity management operations.

• Inclusion of Government securities up to another 5% of NDTL within the mandatory SLR as level 1 HQLA within the Liquidity Coverage Ratio (LCR) requirement, announced with a view to facilitate banks in meeting the LCRs applicable from Jan-15

Given its stance, it is clear that incremental RBI policy action will be contingent on the visibility of the 6% CPI target and hence on incoming data.

ASSOCHAM believes that the 1% gap between RBI⦣8364;™s own subjective forecast (of 6%) and model based projection (of 7%) of CPI inflation by Jan-16, can be adequately bridged by appropriate Government action to quell price pressures. The short term measures undertaken over the last 2-3 months have had a salubrious impact on food inflation, despite monsoon remaining in deficit in excess of 10% along with significant spatial irregularities. We are confident that coordination between monetary and fiscal policy, coupled with pragmatic governance, will facilitate sustained disinflation in the economy, thereby allowing the next rate action to be a rate cut some time in Q1-16. 

Sincerely,

Rana Kapoor

President,

ASSOCHAM