Reserve Bank of India (RBI) in its first Bi-monthly Monetary Policy statement 2014-15 announced on 1 April 2014, has kept the policy repo rate unchanged at 8.0%.
In the first bi-monthly monetary policy statement for 2014-15, the RBI Governor Raghuram Rajan decided to pause and not disturb status quo. The repo rate and the rate at which RBI lends money to banks remained at 8 per cent.
Other policy instruments such as cash reserve ratio also remain unchanged at 4%. The economic growth of country slipped to a decade-low of 4.5 per cent in 2012-13 and is estimated at 4.9 per cent in the current financial year 2013-14.
Thus, on the basis of an assessment of the current and evolving macroeconomic situation, the RBI decided to:
• Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent.
• Increase the liquidity provided under 7-day and 14-day term repos from 0.5 per cent of net demand and time liabilities (NDTL) of the banking system to 0.75 per cent
• Decrease the liquidity provided under overnight repos under the LAF from 0.5 per cent of bank-wise NDTL to 0.25 per cent with immediate effect.
Policy transmission
RBI have decided to further reduce access to overnight repos under the LAF while compensating fully with a commensurate expansion of the market’s access to term repos from the Reserve Bank in pursuance of the recommendation of Dr. Urjit R. Patel Committee.
It recommended to de-emphasise overnight guaranteed-access windows for liquidity management and progressively conduct liquidity management through term repos. The primary objective is to improve the transmission of policy impulses across the interest rate spectrum.
Disinflation target
The policy of RBI is firmly focused on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016.
These include a less-than-normal monsoon due to possible El nino effects; uncertainty on the setting of minimum support prices for agricultural commodities and the setting of other administered prices, especially of fuel, fertilizer and electricity; the outlook for fiscal policy; geo-political developments and their impact on international commodity prices.
For markets
• In order to expand the market for corporate bonds, banks will be allowed to offer partial credit enhancements to them.
• To expand investor demand for Inflation Indexed Bonds, design changes improving their attractiveness to the general public are being worked out.
• Modalities allowing Foreign Portfolio Investors to hedge their currency risks through exchange traded currency futures are being worked out in consultation with SEBI.
• FPIs will be allowed to hedge their coupon receipts falling due during next 12 months.
• KYC norms are being simplified for Foreign Portfolio Investors.
• To encourage longer-term flows and reduce volatility, FPI investments in G-Secs will henceforth be permitted only in dated securities of maturity one year and above, and existing investment in T-bills will be allowed to taper off on maturity/sale.
Background
While framing the first Bi-monthly Monetary Policy statement 2014-15, RBI has implemented few recommendations submitted by Dr. Urjit R. Patel Committee
• Adoption of the new CPI (combined) as the key measure of inflation
• Explicit recognition of the glide path for disinflation,
• Transition to a bi-monthly monetary policy cycle,
• Progressive reduction in access to overnight liquidity under the LAF at the fixed repo rate
• A corresponding increase in access to liquidity through term repos, and
• Introduction of longer tenor term repos as well as, going forward, term reverse repos.
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