Published On: Wed, Oct 23rd, 2013

MID – QUARTER Monetary Policy Review September 2013

MID – QUARTER Monetary Policy Review September 2013RBI’s Mid –Quarter Monetary Policy came as surprise as it announced a hike in the repo rate by 25bps first time in the financial year. The hike was against the market expectation and was duly reflected in the market sentiments after that. The market expectation of rate reduction was because the Federal Reserve a day before has postponed its tapering programme. The repo rate was hikes as per the policy focus of RBI to control inflation.

Along with the repo rate hike, RBI I also reduced the marginal standing facility (MSF) rate by 75 basis points to 9.5% and the minimum daily maintenance of the cash reserve ratio (CRR) to 95% effective from September 21, 2013. This resulted in enhanced short term liquidity and helped correct the yield curve which has tended to get inverted. In the last policy the repo rates were kept unchanged. RBI has now indicated that its prime objective remains to anchor inflation.

There are various challenges before the Reserve Bank of India. First among them is tapering of Quantitative Easing. Advanced economies witness a moderate recovery, but several growing economics witnessed slowdown owing to different factors including the prospects of tapering. Even though the Federal Reserve has called of tapering, the threat remains.

Domestic growth has also weakened and there is a sluggishness in industrial activity and services. Consumer consumption is also showing a downturn. Infrastructure projects are also showing a downward trend. But overall the monsoon was good, and that will be reflected in the agricultural output.

The wholesale price index has risen because of a weak rupee and crude price hike. The food WPI is a concern. The CPI inflation too has tended to crawl around 9.5%. But with some better kharif harvest, CPI will ease down. But still inflation is threat our economy is facing.

Current Account Deficit remained above sustainable levels of 2.5 % owing to weakening domestic savings and lower export demand and rising. The CAD has been now seen as the biggest risk to macroeconomic outlook by RBI. The geopolitical problems arising from west Asia will further aggregate.

RBI Reduced of Marginal Standing Facility (MSF) by 75 basis points and Minimum Daily Maintenance of CRR from 99% of the requirement to 95%. . this was done in order to ease the liquidity situation. The reduction in the MSF rate is aimed at reducing the funding cost of banks. Even though, taking the borrowing  through the MSF and repo rate window from 26th July 2013 when the effective MSF came into operation; it was  observed that on daily average banks borrowed around Rs 47,309 crore through MSF and Rs 38,707 crore through the repo window. The effect in percentage terms on a annual basis wills 3% and there will no significant benefit.

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MID – QUARTER Monetary Policy Review September 2013