RBI has kept the repo and reverse repo rates unchanged at 8.5% and 7.5% respectively. Accepting that the domestic economy growth is clearly decelerating, the central bank has said from this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth
RBI has kept the repo and reverse repo rates unchanged at 8.5% and 7.5% respectively while the marginal standing facility rate is firm at 9.5%. Also the, cash reserve ratio (CRR) which is the amount of cash the banks have to maintain with the RBI as a percentage of their net demand and time liabilities has been unchanged at 6%.
The RBI in its policy note has highlighted that the domestic economy growth is clearly decelerating following the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties. In regards to the deceleration in growth and higher downside risks to growth, RBI said “From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.”
RBI retains the inflation projection for March 2012 at 7% following moderation in food inflation in November 2011 and expected moderation in aggregate demand and hence in non-food manufactured products inflation.
Furthermore, soothing the fears of stress in money market the central bank said there are currently no significant signs of stress in the money market as the overnight call money rate are stable around the policy repo rate and liquidity facilities such as marginal standing facility remain unutilised. However, it also said that in view of the fact that borrowings from the liquidity adjustment facility (LAF) are persistently above their comfort zone, further open market operations will be conducted as and when seen to be appropriate.
As per the data disclosed in the policy statement, the average borrowings under the daily LAF increased to around Rs. 89,000 crore during November-December (up to December 15, 2011) from around Rs. 49,000 crore during April-October 2011. To ease the liquidity conditions the central bank has conducted OMOs on three occasions in November-December 2011 for an amount aggregating about Rs. 24,000 crore.
Speaking on the liquidity condition, Aneesh Srivastava, CIO, IDBI Federal Life Insurance said RBI would continue to use OMOs to infuse liquidity in the system. He said interest rates in economy are sensitive to RBI policy as well as government borrowing programme. He does not expect a secular decline in yields from here on as he feels fiscal deficit to be around 5.6-5.8% of GDP.
Following this move, Atul Kumar, Fund Manager- Equity, Quantum Mutual Fund, said in the near term, there are many headwinds, domestic and global though to a certain extent, these are already factored by the markets. He expects the markets to remain weak in the near term but he is optimistic over the longer term. He also added that buying into good companies with excellent managements at reasonable valuations will create wealth for the investors and one should ignore near term problems and invest for the long term through SIPs.
