Monetary Policy - Rates likely to persist at current levels in 2015- Anand Rathi Financial Services

Monetary Policy - Rates likely to persist at current levels in 2015 by Sujan Hajra ( Chief Economist -Anand Rathi Financial Services)

In line with market consensus, the RBI kept the repo rate unchanged at 7.25%. As the rate cut was front-loaded in the previous monetary policy (Jun'15), today's focus was on the formation of the monetary policy committee and the Governor's power. It is too early to worry about this, since clarity has yet to emerge from the government. While there is a little room for a 25-bp rate-cut, that is likely to come in 4Q FY16.

Policy rate unchanged at 7.25%: As the market expected, in its bi-monthly monetary-policy meeting held today, the RBI kept the repo and reverse-repo rates unchanged at, respectively, 7.25% and 6.25%. Consequently, the MSF and bank rate also stand at 8.25% each. Also, as expected, the cash-reserve ratio (CRR) and statutory-liquid-ratio (SLR) were held unchanged.

Worried about inflation, but lowers projections: The policy statement shows that the RBI expects inflation to be worrying in the next few months, due to inflation in vegetable-pulses-milk rising. The base for the next two months is quite favourable, but the RBI will look at the seasonal and base impacts. Services inflation was unchanged at 4.1% in Jun'15; ahead, we are likely to see the lagged impact of the higher service tax on the coming CPI data. Taking a cue from consistently soft crude prices and near-normal monsoon (4% deficit), the RBI has reduced inflation projections for Jan-Mar by 0.2%. Liquidity conditions have been easy in the past two months; the RBI has also conducted OMO sales to revive demand for longer duration reverse repos.

Assessment and Outlook: In Jun'15 the RBI had front-loaded today's rate-cut. The focus on today's monetary policy was on the future of the monetary-policy committee and the role of the Governor. Governor Rajan deciding to hold rates despite pressures from various circles augurs well for the independence of the RBI. The importance of CPI inflation as the correct measure was re-instated, highlighting the uselessness of the WPI figures from a policy perspective. The real policy rate (with respect to the CPI) implies that there exists a small window for another 25-bp rate cut. The timing of this would depend on inflationary trends, rainfall during Aug-Sep and the US Fed hike. Barring unexpected softening of either growth or inflation, we feel that the probability of a further rate cut in 2015 is low. Nevertheless, if the lower inflation projections by the RBI materialise (our estimates also show inflation softening), the RBI might in end 2015 pare the rate by a further 25bps.

Source : Equity Bulls

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