Monetary Policy as on 5-AUG-2014

On the basis of an assessment of the current and evolving macroeconomic situation,

RBI has been decided to:
Keep the policy repo rate under the liquidity adjustment facility (LAF)
unchanged at 8.0 per cent;
Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per
cent of net demand and time liabilities (NDTL);
Reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by
50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect
from the fortnight beginning August 9, 2014; and
Continue to provide liquidity under overnight repos at 0.25 per cent of bank-
wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75 per
cent of NDTL of the banking system.
Consequently, the reverse repo rate under the LAF remains unchanged at 7.0 per
cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.
Reasons Behind the Decisions:-
The global economic activity is at modest space from a slowdown in Q1. Investor
Risk Appetite has buoyed financial markets, partly drawing strength from assurances
of continuing monetary policy support in industrial countries.
Portfolio flows to emerging market economies(EMEs) have risen strongly, this
implies that EMEs remain vulnerable to any changes in investors risk capacity by
reassessing the future path of US monetary policy or of any geopolitical tensions.
Liquidity conditions have remained broadly stable. Therefore the RBI will review the
existing liquidity arrangements and continue to monitor and manage liquidity to
ensure adequate flow of credit to the productive sectors.
SLR reduction is necessary to enhance liquidity in the money and debt markets so that
financial intermediation expands apace with a growing economy. Presently, banks are
permitted to exceed the limit of 25 % of total investments under the HTM (Held to
Maturity) category. HTM provided the excess comprises only to SLR securities. Bank
Holdings of SLR securities in HTM Category are not more than 24.5% of their
NDTL. In order to enable banks greater participation in financial markets, this ceiling
is being brought down to 24% of NDTL with effect from the fortnight beginning
AUGUST 9, 2014.
RBI aims to focus to lend more to Production Sectors.
The decisions help the govt in manage its finances properly and understands that govt
is in path of fiscal consolidation.
RBI views to have more frequent term repo actions, lend more towards productive
sectors.
The slash in SLR is not intended to make loans cheaper but to allow banks to meet the
liquidity ratios.

RBI believes that its January 2015 CPI target of 8 percent will likely be met, but said
it is critical that the disinflationary process is sustained over the medium-term given
upside risks to its January 2016 CPI target of 6 percent.

Obligations put on Indian banks need to be reduced further as they are entering a
more competitive environment and the statutory liquidity ratio will have to be cut
further.


IMPACT in Markets
The market remained flat when RBI announced its bi-monthly policy review. Sensex
was down with 4.46 points at 25718.70 and Nifty up with 4.95 points at 7688.60.
About 1242 shares had advanced, 1000 shares declined and 101 shares unchanged.
The bond markets remained somewhat nervous post release of the policy statement.
The 8.4 percent 2024 G-Sec yields rose 0.78 percent, perhaps sensing some hawkish
tones. That said, rates are likely to remain in a range of 20-30 basis points from the
current 8.55 percent.
Investor Outlook after policy
Global economic activity picking up modestly. Investor risk appetite has buoyed
financial markets, but emerging market economies vulnerable to reassessment of US
monetary policy or possible escalation of geopolitical tensions.
The reduction in HTM was also not viewed too kindly by stock markets as banking
stocks fell. Lower HTM would expose banks investments to the price vagaries (as
they have to be marked to market).
Investors have seen this policy as a hawkish tone.

Sectors Affected
Initially the Bank Nifty fell to 15135 points from a days highest of 15316 points. The
stock remained volatile till 2pm and suddenly recovered to 15293.35 points.
The second stock that had effect was BSE IT which was hovering around 9823 points
and just after the policy been presented it dropped to 9743 points.

Karthik Janardhanan. (+917736530646)