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Update from Research Desk on the First Bi-monthly Monetary Policy Statement, 2014-15
April 1, 2014

This is a note on the First Bi-monthly Monetary Policy Statement, 2014-15 by Dr. Raghuram G. Rajan

Author : Dr. Renu Pothen

Update Monetary Policy 2013-14

Update from Research Desk on the First Bi-monthly Monetary Policy Statement, 2014-15

The market seems to have understood Dr. Rajan and his policy stance well by now. As expected by analysts and experts, the Reserve Bank of India (RBI) kept the Repo Rate and Cash Reserve Ratio (CRR) unchanged at 8.0 per cent and 4.0 percent respectively. In this policy statement Dr. Rajan has made it very clear that the recommendation of the Urjit Patel Committee Report to reckon the new CPI (Combined) as the key measure of inflation has been implemented. In this scenario, the RBI’s focus will be on achieving a CPI inflation target of 8% by January 2015 and 6% by January 2016.

As per the Report “There are risks to the central forecast of 8 per cent CPI inflation by January 2015 stemming from a less-than-normal monsoon due to possible el nino effects; uncertainty on the setting of minimum support prices for agricultural commodities and the setting of other administered prices, especially of fuel, fertiliser and electricity; the outlook for fiscal policy; geo-political developments and their impact on international commodity prices. There will also be a downward statistical pull on CPI inflation exerted by base effects of high inflation during June-November 2013. It is critical to look through any transient effects, including these base effects, which could temporarily soften headline inflation during 2014”.

In short, team RBI is very clear that their focus will be on inflation and this in turn means that easing of monetary policy will take some more months to materialize.

As for Growth, The RBI’s stance is very clear: "Contingent upon the desired inflation outcome, real GDP growth is projected to pick up from a little below 5 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15 albeit with downside risks to the central estimate of 5.5 per cent. Lead indicators do not point to any sustained revival in industry and services as yet, and the outlook for the agricultural sector is contingent upon the timely arrival and spread of the monsoon. Easing of domestic supply bottlenecks and progress on the implementation of stalled projects already cleared should brighten up the growth outlook, as would stronger anticipated export growth as the world economy picks up".

The policy document also touched upon a few measures on which the Central Bank has been actively working on like Foreign Portfolio Investments into debt market, confer banking licenses immediately, reduce window dressing that Banks do in the month of March, extension in implementation of Basel III Capital Regulations in India, modifications in Inflation Indexed National Savings Securities, etc.

Takeaway for our Investors:

We at iFAST Research have been informing our investors that the debt market is going to be in a volatile phase as the policy stance of the RBI has not been too optimistic about easing of rates. This inference has been drawn from the policy documents and the observations that we have made after listening to Dr. Rajan’s statements at various forums. Hence, in this scenario we continue to be positive on Short Term Funds for a one-year time horizon and Dynamic Bond Funds, if the holding period is more than a year. As for our investors who had taken an exposure into income funds, we believe that they will have to bear with some more pain and hence we suggest them to be patient with these investments.


Dr. Renu Pothen
Research Head-Investment Advisory Division

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