By Ruma Dubey

It was as expected, to some extent. RBI kept the CRR unchanged at 4% and repo rate was also unchanged at 8%. But the surprise was that the RBI Governor went on to cut SLR by 50 bps.  And another surprise was that it went on to reduce liquidity provided under the export credit refinance (ECR) facility from 50% of eligible export credit outstanding to 32% with immediate effect. This cut in SLR and ECR was compensated by increase in term repo rate facility to the tune of 0.25% with immediate effect.

A quick highlight of the policy announcements:

• Repo rate under the liquidity adjustment facility (LAF) unchanged at 8%;
• Cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL)
• Reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23% to 22.5% of their NDTL with effect from the fortnight beginning June 14, 2014;
• Reduced the liquidity provided under the export credit refinance (ECR) facility from 50% of eligible export credit outstanding to 32% with immediate effect;
• Introduced a special term repo facility of 0.25% of NDTL to compensate fully for the reduction in access to liquidity under the ECR with immediate effect; and
• To continue to provide liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system.
• Reverse repo rate under the LAF will remain unchanged at 7% and the marginal standing facility (MSF) rate and the Bank Rate at 9%
• Allows foreign portfolio investors to participate in the domestic exchange traded currency derivatives market to the extent of their underlying exposures plus an additional US$ 10 million. 
• Eligibility limit for foreign exchange remittances under the Liberalised Remittance Scheme (LRS) has been increased from US$ 75,000 to US$125,000.
• Allows all residents and non-residents except citizens of Pakistan and Bangladesh to take out Indian currency notes up to Rs.25,000 while leaving the country.

The Policy was, as we mentioned was very much on expected lines. And really, at this juncture, it made no sense to tinker with the policy rates. The RBI, whose main aim is to keep an eye on inflation now needs to be all the more vigilant given the probability of El Nino, which in turn could spike up inflation all around.

But the tone largely remains dovish. The Governor has stated that “RBI remains committed to keeping the economy on a disinflationary course, taking CPI inflation to 8% by January 2015 and 6%by J anuary 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”. But this is indeed the right stance – being dovish. Otherwise it would have been too premature; RBI also needs to wait and watch how the Govt moves on reforms and economic growth. Frankly, if the Govt does its job well and RBI does its job as it is doing, there is really no need for either to interfere with each other. As the RBI has always said, even Rajan’s predecessor, Subbarao said that easing of domestic supply bottlenecks and progress in the implementation of stalled projects should brighten the outlook for both manufacturing and services. And that is what the Govt needs to work on with urgency.

The RBI has also allowed foreign portfolio investors to participate in the domestic exchange traded currency derivatives market to the extent of their underlying exposures plus an additional US$ 10 million. This means that companies which deal in foreign currency trading are sure to see a surge in activity. Also by increasing the forex remittance eligibility to US$125,000 indicates that the RBI is now pretty confident about the rupee vis-à-vis the US dollar.

Expecting any rate cut in the immediate future is too early; we will have to wait for more data – monsoon, rupee, Union Budget, CPI rates, growth rates. Not dovish or hawkish, this is a consistent policy. And we are surely not going to see any change in rates from Banks.

The third bi-monthly monetary policy statement is scheduled on Tuesday, August 5, 2014.