 "RBI has clearly shifted focus towards 6% inflation target: Upasna Bhardwaj")
Upasna Bhardwaj, economist, ING Vysya Bank shares her observation regarding the RBI Policy announced today with Jinsy Mathew
The Reserve Bank of India (RBI) has kept key rates unchanged in Tuesday’s bi-monthly policy review. Was this on expected lines? What are your takeaways?
The Policy decisions announced are mostly in-line with expectations, as we were expecting the repo and reverse repo rates to be kept unchanged because of a whole lot of upside risks currently. More importantly, what is evident from the announcements is that now the RBI Governor has shifted his focus more towards the medium-term inflation target rather than just emphasising the January 2015 target. That itself suggests the kind of inclination that the Governor would put on the inflation going forward.
This Policy rules out any kind of easing in this fiscal year which is also in-line with our expectation. We can expect any action on this front only next year onwards, when the RBI Governor is more convinced of disinflationary pressures reducing which will bring down overall headline inflation on a more sustainable path towards 6%.
What about the 50 basis point (bps) cut in the Statutory Liquidity Ratio (SLR)?
Such a move by the RBI was expected as this would free up access to credit whenever the credit cycle picks up. However, this is not expected to have an impact immediately as currently it’s a lean credit period. At the same time, the RBI is also trying to reduce the statutory norms so that banks can have the flexibility in meeting the Liquidity coverage ratio (LCR) related requirements which begin January onwards.
Would you say the Governor sounded more hawkish this Policy as compared to the last Policy?
I agree. The governor has shifted his focus towards a 6% inflation target and hence there has been an alignment in expectations which has moved away from 8% to 6% and this is more hawkish. Considering that we are at a point where between the last policy and now a lot of risk has abated like inflation has been benign (core and headline) and monsoon has progressed. But, it must be noted that we are at a cusp where these risks could turn ugly as we go ahead. If the spatial distribution of monsoon doesn’t improve in August it’s not going to bode too well for the economy. To that extent the Governor has correctly stated his stand. While announcing the previous policy, he did mention that there was room for monetary easing if inflation trajectory was below what they were anticipating. With this Policy he has balanced the stand taken with regards to inflation.
How do you see this Policy change anything on ground?
I do not expect much to change per se. It is slightly negative for the bond market because the held to maturity (HTM) norms that has been announced may cause some sell-off. But the selloff is not likely to sustain just because of this Policy. The impact of the SLR cuts, which includes the last one as well, will be visible only towards the end of the year as the economic revival has just started.
In what range do you see the Rupee trading?
The central bank has been very vigilant on the rupee and has been managing the currency well. I do not expect the rupee to sustain below the levels of 60 (against the US dollar) for long. So it’s more of a range of 60 - 62 going ahead.
The Reserve Bank of India (RBI) has kept key rates unchanged in Tuesday’s bi-monthly policy review. Was this on expected lines? What are your takeaways?
The Policy decisions announced are mostly in-line with expectations, as we were expecting the repo and reverse repo rates to be kept unchanged because of a whole lot of upside risks currently. More importantly, what is evident from the announcements is that now the RBI Governor has shifted his focus more towards the medium-term inflation target rather than just emphasising the January 2015 target. That itself suggests the kind of inclination that the Governor would put on the inflation going forward.
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Do you see any chance of a rate cut this fiscal?
This Policy rules out any kind of easing in this fiscal year which is also in-line with our expectation. We can expect any action on this front only next year onwards, when the RBI Governor is more convinced of disinflationary pressures reducing which will bring down overall headline inflation on a more sustainable path towards 6%.
What about the 50 basis point (bps) cut in the Statutory Liquidity Ratio (SLR)?
Such a move by the RBI was expected as this would free up access to credit whenever the credit cycle picks up. However, this is not expected to have an impact immediately as currently it’s a lean credit period. At the same time, the RBI is also trying to reduce the statutory norms so that banks can have the flexibility in meeting the Liquidity coverage ratio (LCR) related requirements which begin January onwards.
Would you say the Governor sounded more hawkish this Policy as compared to the last Policy?
I agree. The governor has shifted his focus towards a 6% inflation target and hence there has been an alignment in expectations which has moved away from 8% to 6% and this is more hawkish. Considering that we are at a point where between the last policy and now a lot of risk has abated like inflation has been benign (core and headline) and monsoon has progressed. But, it must be noted that we are at a cusp where these risks could turn ugly as we go ahead. If the spatial distribution of monsoon doesn’t improve in August it’s not going to bode too well for the economy. To that extent the Governor has correctly stated his stand. While announcing the previous policy, he did mention that there was room for monetary easing if inflation trajectory was below what they were anticipating. With this Policy he has balanced the stand taken with regards to inflation.
How do you see this Policy change anything on ground?
I do not expect much to change per se. It is slightly negative for the bond market because the held to maturity (HTM) norms that has been announced may cause some sell-off. But the selloff is not likely to sustain just because of this Policy. The impact of the SLR cuts, which includes the last one as well, will be visible only towards the end of the year as the economic revival has just started.
In what range do you see the Rupee trading?
The central bank has been very vigilant on the rupee and has been managing the currency well. I do not expect the rupee to sustain below the levels of 60 (against the US dollar) for long. So it’s more of a range of 60 - 62 going ahead.