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RBI Keeps Rates Unchanged, Will Wait Till Early Next Year


RBI has changed no rates. CRR remains at 4%, SLR is stagnant and repo/reverse rates are at 8%/7%.

The important paragraph is this:

18. Still weak demand and the rapid pace of recent disinflation are factors
supporting monetary accommodation. However, the weak transmission by banks of
the recent fall in money market rates into lending rates suggests monetary policy
shifts will primarily have signaling effects for a while
. Nevertheless, these signaling
effects are likely to be large because the Reserve Bank has repeatedly indicated
that once the monetary policy stance shifts, subsequent policy actions will be
consistent with the changed stance
. There is still some uncertainty about the
evolution of base effects in inflation, the strength of the on-going disinflationary
impulses, the pace of change of the public’s inflationary expectations, as well as the
success of the government’s efforts to hit deficit targets. A change in the monetary
policy stance at the current juncture is premature. However, if the current inflation
momentum and changes in inflationary expectations continue, and fiscal
developments are encouraging, a change in the monetary policy stance is likely
early next year, including outside the policy review cycle.

In plain-speak:

  • Banks are being dirty rotten scoundrels (okay, he didn’t say that) and not passing on reduced market interest rates (from 8.5% to 8% already) to customers. So the “transmission” is weak.
  • They are waiting for us to say we’ll cut repo rates. (Signal)
  • And RBI also says yeah, once we cut, we’ll keep cutting. So big signal.
  • But we can’t cut right now.
  • Why? Because that inflation isn’t falling that much really, and the government fiscal deficit is dangerous.
  • We’ll have to wait.
  • But yes, if data continues to look good, we’ll cut. Probably early next year.
  • And we might not even wait for policy dates for that to happen.

So yes, rates are not cut yet, but very soon, they will be.

What RBI expects: Lower Inflation Going Forward

Most likely as low as 6% by March, says the RBI:


They do mention risks like lower agri production, fiscal deficit issues (from lower govt tax revenues and failure to disinvest).

GDP Growth though, is expected to be around 5.5%.


Things They Haven’t Mentioned But Spoke About In the Conf Call

  • Banks may be allowed some room to restructure better with 5/25 schemes and to take on more equity (to be decided with SEBI)
  • The government is moving up and beginning to act. Railways is moving, he says.
  • Oil prices are a big help. Three sets of reasons: Slowdown in Europe, Slowdown in China and the price war.
  • NPAs are a problem and we will help where banks have made mistakes in given too short term a loan, for example.
  • NPAs also have frauds who siphon off assets, and RBI doesn’t like that. We need to speed up judicial processes.

Markets Wobble

Banks were weak, then went up huge, and eventually slid back 100 points (-0.5%) at the time of writing this post.  The Nifty too fell about 0.5%.


(11 AM was the policy time)

Bond yields though have fallen to 8.02% on the 10 year. This is consistent with market moves to lower rates in general.

Overall, this policy was expected, and we had flagged in Capital Mind Premium that rate cut chances were weaker because of month-on-month core inflation increases which is basically a higher move on inflation net of the base effect.


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