Five takeaways from the RBI policy

Though inflation remains a concern, Rajan has prepared the grounds for future growth by reducing SLR

RBI governor Raghuram Rajan lived up to market expectations by keeping interest rates unchanged.

The policy repo rate has been left unchanged at 8 per cent, as has the cash reserve ratio (CRR) of scheduled banks, at 4 per cent. But the governor provided more liquidity in the system and gave banks more leg room by reducing the statutory liquidity ratio (SLR) by 50 basis points (0.5 per cent).

However, analysts and economists give more weightage to the language used by the governor these days, and derive their inferences from it. On this score, the language Rajan used today is certainly more dovish than what we have been hearing since the time he took charge.

Following are the five key takeaways from RBI's credit policy:

1. Rather than dwelling on a scenario for a rate hike or maintaining the status quo, Rajan has talked of a scenario for reducing rates in the policy document. While maintaining its stance that RBI remains committed to keeping the economy on a disinflationary path, the apex bank said that if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance.

2. The RBI governor, by reducing SLR, is preparing ground for future growth. The rationale given by RBI for reducing SLR is to provide for a pick-up in credit offtake. Consider the following statement: "As the economy recovers, investment demand and the need for credit will pick up. To the extent that this contributes eventually to supply, it is important that banks have room to finance it. A reduction in the required SLR will give banks more freedom to expand credit to the non-Government sector."

3. Though RBI is providing for growth, it have not yet revised its growth estimates. RBI continues to expect a growth of 5-6 per cent in FY15, with risk evenly balanced around 5.5 per cent. A weaker outlook for agriculture due to the EL Nino effect is being offset by expected easing of domestic supply bottlenecks, implementation of stalled projects and growth in exports.

4. Inflation however, continues to be a cause for concern for RBI. The governor expects CPI inflation at 8 per cent in the current fiscal, and 6 per cent in the next. CPI inflation other than food and fuel has been coming down. Food inflation, on the other hand, has been rising on seasonal issues which can get worse with the El Nino effect. RBI, however, feels that the upside risk of El Nino, geo-political tensions and their impact on fuel prices and uncertainties surrounding the setting of administered prices at this stage appear to be balanced by the possibility of stronger Government action on food supply and better fiscal consolidation.

5. Rajan is comfortable with the foreign exchange position, given the inflows of portfolio investment, supported by foreign direct investment and external commercial borrowings. As a result of this, he has allowed foreign portfolio investors to participate in the domestic exchange traded currency derivatives (by way of hedging) market not only to the extent of their underlying exposures in various asset classes, but an additional $10 million. He has further increased the eligibility limit of foreign exchange remittances from $75,000 to $125,000.