Reserve Bank of India Policy Near Possible Turning Point

June 3, 2014

Repo and reverse repo hikes of 25 basis points each were implemented last September 20, October 30 and January 28.  Policy has since been on hold in terms of rate level with the repo at 8.0% and the reverse repo at 7.0%.  But the just completed bi-monthly review, to boost liquidity, authorizes a reduction of “the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23.0 per cent to 22.5 per cent of their NDTL with effect from the fortnight beginning June 14, 2014.”  A spring spike in CPI inflation due to higher food prices and prior rupee depreciation has been contained, and core inflation has started to recede.  Officials feel that further tightening will prove unnecessary and seem to identify greater likelihood of a cut than a hike going forward.  Policymakers

remain committed to keeping the economy on a disinflationary course, taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. If the economy stays on this course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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