Economist Radhika Rao's comments on RBI policy - DBS Bank

Radhika Rao, Economist, Group Research, DBS Bank:

Tuesday's policy was along expected lines on the rates front, but carried a bigger emphasis on liquidity conditions. Along expected lines, the RBI cut the benchmark rate by 25bps to 6.5% on Tuesday, with an accommodative bias contingent on monsoon progress, direction of headline / core CPI inflation and transmission process.

It was a prudent move to defer a bunched up move, especially in light of the uncertainty that surrounds the impact and extent of the pay commission changes. To recap, the impact of higher public sector wages and housing allowance adjustments are not yet factored into the central bank's inflation estimates.

Meanwhile, today's decision was more focused on addressing liquidity shortage and easing the transmission mechanism. There is a significant shift in their emphasis on the NDTL framework, narrowing the corridor around the operational repo rate and CRR changes. This is to ensure that the easy policy stance percolates to the real economy and materially lowers financing costs. These changes are likely to provide positive impetus to the financial markets in the near-term.

Source : Equity Bulls

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