By Ruma Dubey

“Lets fight the anti-inflation fight once and win”. That’s explains the current and future stance of the RBI Governor, Mr.Raghuram Rajan.

More than the policy, which was more status quo, with minor tweaking, it was the ensuing Press Conference which was more telling. It gave us a perceptive insight into the myriad of issues which the Governor is thinking about. And what we came across with was a very assuring feeling that the country’s banking could not have been in better hands. This is a Governor who has an eye on inflation but at the same time, is keeping the other eye on growth. And this is probably what the market looked at – promise of a rate cut when inflation comes down and a very confident RBI Governor at the helm to tackle fiscal issues, which explains the market spiking up despite a dull policy; the Press Conference was more action packed!

No surprises here in the policy in terms of repo and reverse repo rates. No change in these rates but the only change is that SLR and HTM have been cut, effective 9^th August 2014. This might not go down too well with the bond market which is as such sitting on an excess of supply over demand. For the stock markets, this was business as usual; it went about on its own track because, for markets, it is only the interest rates which tend to make any palpable difference. The SLR cut was more symbolic and the message sent across was that RBI remains hawkish when it comes to inflation, giving us a new target of 6% by January 2016, which is after we first achieve the milestone of 8% by January 2015 – this means that RBI has warned us that there is a new target, so let’s not get ahead of time.

In the bond markets, there is excess SLR in the system and excess supply of bonds, with no real need for credit currently, thus bond yield in immediate term might go down. The RBI Governor has explained that by cutting the SLR now, when growth picks up, there is already credit made available. He has explained that when credit is not strong, it is the best time to cut SLR – this is more about future planning and expects this to help going forward as RBI creates room to lend more to productive sectors.

Short terms risks are more balanced than before but risk of monsoon remains. The RBI explained that a below par monsoon does not necessarily mean lower food production depending on where it rained and lower production does not necessarily mean higher food prices if supply is managed well. Mr.Rajan said that policy tightening is unwarranted for if inflation follows the chalked out growth path. The RBI Governor said that rise in vegetables was more seasonal and he was not overtly worried, while saying at the same time that a watchful eye will be kept.

What also came across from the Press Conference is that the Governor is looking ahead and anticipating things to get better. While being proactive by providing for this, he is probably the first Governor to acknowledge that banks are today thriving in a new and changing economy and thus RBI needed to keep this in mind, instead of sticking to age-old tinkering. It was also good to know that going forward; he would prefer removing some domestic constraints on banks as they now work in a more competitive atmosphere.

What about risk caused by flight of FII money as QE comes to an end? Mr.Rajan quoted Warren Buffett, “"Only when the tide goes out do you discover who's been swimming naked." And Mr.Rajan said, “I do not anticipate it to be us!”

Highlights of the Credit Policy:

• Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent;
• Cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
• Reduced statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect from the fortnight beginning August 9, 2014.
• To continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL  and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.
• This means, reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.
• Remains committed to the disinflationary path of taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016.
• The fourth bi-monthly monetary policy statement is scheduled on Tuesday, September 30, 2014.