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RBI Changes Nothing, Which Spooks Markets


The Reserve Bank of India (RBI) today changed nothing, which nowadays is a big event in the markets.


In the mid-quarter policy review, RBI has said a lot of things.To simplify:

The Global Economic Situation is horrible. The outlook is bad, and other countries in Asia have seen both currency depreciation and policy rate cuts.

Indian growth is definitely down. They quote the IIP (-5.1% in Oct), the de-growth in GDP (6.9% in Q2 FY12 versus 8.6% last year), the HSBC PMI that’s shown some contraction. (I have graphs for everything)

Inflation is still bloody high. November 2011 Inflation was at 9.11%, above the comfort level of the RBI.

The rupee has fallen a lot, and the RBI has taken steps to attract inflows: Increasing limits on investment in govt. and corp debt, raising ceilings on NRI deposits, and increasing the ceiling on corporate borrowings abroad.

The Fiscal Situation is terrible. The deficit is likely to fuel inflation further.

Non-food credit growth is 17.5%, which is lower than expected growth of 18%.

There is no liquidity crisis, even though banks are borrowing around 90K cr. from RBI overnight through repo every day. The MSF (Marginal Standing Facility) remains unutilized – it’s at a 9.5% rate. OMO purchases of GOI bonds are likely to continue, to ease some the liquidity issues, but there’s no real stress.

What is significant:

While inflation remains on its projected trajectory, downside risks to growth have clearly increased. The guidance given in the SQR was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.

Perhaps they will cut rates in the next review – if by that time the rupee hasn’t hit 60 or something.


Repo Rate: 8.5%.
Reverse Repo: 7.5%
Cash Reserve Ratio: 6%
Statutory Liquidity Ratio: 24%

If you want an explanation of these terms, let me know.


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