January 15, 2015

Update on RBI Governor's Statement on Monetary Policy
An update on the RBI Governor's Policy Statement released today.

by iFAST Investment Advisory Division

 RBI Policy Note- Jan15

RBI Governor has kept his commitment to change the monetary policy stance as communicated in the Fifth Bi-Monthly Monetary Policy Review held on December 2,2014.As per his statement which was released today, the repo rate under the liquidity adjustment facility (LAF) has been reduced by 25 basis points from 8.0% to 7.75%.Consequently,the  reverse repo rate under the LAF stands adjusted to 6.75% and the marginal standing facility (MSF) rate and the Bank Rate to  8.75%.

The Governor’s statement released today read as follows:

Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing. The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements. To some extent, lower than expected inflation has been enabled by the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil. Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target.These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects. Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016. These developments have provided headroom for a shift in the monetary policy stance.

Our Take

We had stated in our Debt Outlook released in December 2014 that “The  RBI Governor, at the current juncture, is not very rigid about the policy stance and is willing to ease the monetary policy as soon as conditions are conducive for the same. In this scenario, we advice our investors whose risk appetite is moderately aggressive and aggressive to take an exposure into income funds and gilt funds with a time horizon of 2 years”. We continue to maintain this stand after today’s statement by the RBI Governor.


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