 "RBI showed resolve to develop term money market: Shyam Srinivasan")
The policy is on expected lines and, in the governor's own words, a policy without any surprise. Given the uncertainties with respect to the monsoon, administered prices, fiscal policy and geopolitical developments affecting inflation, the Reserve Bank of India (RBI) took a wait-and-watch stance, before deciding on the policy direction.
By guiding the market from daily repo to term repo, RBI has shown its resolve to develop the term money market (15 days to a year). Once the term money market develops, it will create new benchmarks akin to the London Interbank Offered Rate for various currencies and different tenures such as overnight, a week, a month, three months, six months and 12 months. In India, we trade only in the overnight Mumbai Interbank Offered Rate, as other tenures do not have much credibility, and there isn't much trading activity in those tenures. By moving markets from the overnight segment to the term repo segment, with tenures such as 14, 28 and 42 days at market determined rates, data points for the term money curve will be available. This will then become the basis for trading in the interbank term money segment and a base for corporate lending for shorter tenures, currently based on demand and supply at ad hoc quotations. The move will also ensure better transmission of policy impulses across the interest rate spectrum.
Future policy action is likely to be based on the path laid down by the Urjit Patel committee, which had targeted Consumer Price Index-based inflation of less than eight per cent by January 2015 and less than six per cent by January 2016. I expect inflation to fall in the short-to medium-term and the interest rate cycle to be close to its peak.
By guiding the market from daily repo to term repo, RBI has shown its resolve to develop the term money market (15 days to a year). Once the term money market develops, it will create new benchmarks akin to the London Interbank Offered Rate for various currencies and different tenures such as overnight, a week, a month, three months, six months and 12 months. In India, we trade only in the overnight Mumbai Interbank Offered Rate, as other tenures do not have much credibility, and there isn't much trading activity in those tenures. By moving markets from the overnight segment to the term repo segment, with tenures such as 14, 28 and 42 days at market determined rates, data points for the term money curve will be available. This will then become the basis for trading in the interbank term money segment and a base for corporate lending for shorter tenures, currently based on demand and supply at ad hoc quotations. The move will also ensure better transmission of policy impulses across the interest rate spectrum.
Future policy action is likely to be based on the path laid down by the Urjit Patel committee, which had targeted Consumer Price Index-based inflation of less than eight per cent by January 2015 and less than six per cent by January 2016. I expect inflation to fall in the short-to medium-term and the interest rate cycle to be close to its peak.
Shyam Srinivasan
MD & CEO, Federal Bank
MD & CEO, Federal Bank