RBI monetary policy: Rajan remains worried about inflation, say analysts

Mumbai: The Reserve Bank of India (RBI) kept its key policy repo rate unchanged at 8.0 percent on Tuesday, as widely expected, while expressing concern about risks to its target to bring consumer inflation down to 6 percent by January 2016.

The Reserve Bank of India also kept both the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) unchanged.

COMMENTARY

KUMAR RACHAPUDI, SENIOR RATES STRATEGIST, ANZ, SINGAPORE:

“The overall stance of the RBI remains cautious even though it mentioned that the risks to its inflation objective have somewhat decreased from pre-policy. From a markets perspective, the impact of reduction in HTM assets is marginally negative for bonds”.

KILLOL PANDYA, SENIOR FUND MANAGER - DEBT, LIC NOMURA ASSET MANAGEMENT, MUMBAI

“The policy is totally in line with expectations. There have been no surprises at all. RBI Governor Raghuram Rajan remains worried about inflation. The governor worries that inflation would not remain at a lower level in the long run. I think RBI has given a guidance of wait-and-watch policy on interest rates. He has asked the government to reduce bottlenecks to ease food inflation which fall under fiscal space than monetary.”

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R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS MUTUAL FUND, MUMBAI:

“Our expectation is that even after the base effect is accounted for, inflation by January 2015 will be substantially lower than 8 percent.

RBI is going to roll the goalpost one year forward, and if the CPI inflation moves towards 7 percent then we expect a gradual pace of rate cuts, and if inflation moves closer to their target 6 percent then we can probably expect a more aggressive rate of pace cuts.

The reaction on HTM cuts was already priced into the market and it is very muted. We continue to believe cuts in HTM and SLR requirements over a period of time will be driven by RBI’s goals to have banks meet their Basel-III liquidity norms.”

BACKGROUND

- India regained its “stable” rating from Standard and Poor’s on Friday, more than two years after an embarrassing downgrade, in a validation of Prime Minister Narendra Modi’s ambitious agenda of economic and fiscal reforms.

- Reserve Bank of India Governor Raghuram Rajan said the country suffered from “persistent” inflation, adding India had to act, while also noting the need for more data across important economic indicators such as employment and producer prices.

- The RBI Governor said India’s macroeconomic indicators are improving and inflation has been coming down consistent with the central bank’s forecast, but Asia’s third-largest economy needs investment growth to pick up.

- India’s wholesale price inflation eased to its lowest level in nearly five years in August, but the central bank is likely to keep interest rates on hold later this month to prevent a revival in price pressures once the economy gains momentum.

- India’s state banks need to improve monitoring of loans and root out “bad apples” and “bad practices,” Reserve Bank of India Governor Raghuram Rajan said, as the sector continues to struggle with bad assets.

- Retail inflation, which the central bank tracks for setting lending rates, edged down marginally to 7.8 percent in August from 7.96 percent a month earlier, helped by slower annual rises in prices of fuel and clothes.

- The RBI, which wants to bring retail inflation down to 6 percent, received conditional support for this target from Finance Minister Arun Jaitley who is putting emphasis on stronger economic growth.

Reuters