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The Reserve Bank of India (RBI) in its third quarter review of monetary policy 2013-14 announced an increase in the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 8.0 per cent; and kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL)
A day earlier key benchmark indices crashed nearly two percent on account of global cues and on subdued sentiment ahead of the policy review. Street had expected RBI Governor –Raghuram Rajan to maintain status quo on the rate front. But instead taking a leaf out of Urijit Patel committee’s recommendation on inflation targeting, RBI decided to raise repo rates on Tuesday.
On being asked whether RBI would now target consumer price indexed (CPI) inflation , as suggested by Urjit Patel committee, Rajan said, "The fact is we need to bring down inflation. Given the fact that CPI has remained quite high, we have to bring it down. The Urjit Patel committee has given a reasonable time to achieve that. The fact that the index isn’t perfect doesn’t stop us from starting that exercise"
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Although RBI said it does not foresee further near-term tightening if consumer price inflation eases as projected, the approach seems to one centered on inflation rather than growth.
Varun Goel, Head- Portfolio Management Service, Karvy Stock Broking tells Manu Kaushik what will be the likely impact of this on equity markets. He also speaks on what themes he likes and what are the near term negative cues for equity markets.
Your assessment of RBI's third-quarter review of monetary policy?
Varun Goel : The emphasis on core CPI as an inflation metric has become the cornerstone of India’s new monetary policy under Governor Rajan. RBI seems to have clearly endorsed Dr. Urijit Patel Committee recommendations for a ‘glide path’ to disinflation. RBI will be looking to reduce headline CPI to 8% by January 2015 and 6% by January 2016. We expect RBI to maintain a hawkish stance to achieve these objectives as a significant drop in inflation appears unlikely in the short term.
Governor Rajan has denied inflation targeting , do you think 25bps repo rate hike was justified given growth concerns are equally grave?
I think inflation targeting may not be officially made a policy objective. But that seems to be the single biggest concern right now. So the focus is expected to stay there. We expected another 25bps hike in H1. There have been three rates hikes in last four months. With growth outlook very weak, we believe RBI might maintain the rates at current levels in the immediate future.
A sell-off was witnessed today after the credit policy was flashed. Do you think this will add to the volatility going ahead?
Varun Goel : Today’s rate hike was largely discounted by the market in the last few days and we expect global factors to drive the market going forward. We have federal reserve meeting this week which would be important for markets
