RBI’s Q2 review of Monetary policy is more like review of Financial markets policy…

The much hyped tatement is out and has become even shorter. Not sure what it achieves as it leaves out many crucial things covered in previous reviews.

There is a possibility that Rajan wants to shape his statement as just a few paras as seen in case of other central banks. This could be the first step towards such a statement. So may be in future you just see rate action, one para on global economy, one on Indian economy and may be another one on  a topical issue…

But then why mention things like five pillars, reforms in banking etc in this statement. You could have minimised this saying the measures on banking and finance will be announced as and when…

Following decisions have been taken:

  • Reduce the MSF rate by 25 basis points from 9.0% to 8.75%
  • Increase the policy repo rate by 25 basis points from 7.5% to 7.75%
  • CRR unchanged at 4.0% of NDTL
  • Increase the liquidity provided through term repos of 7-day and 14-day tenor from 0.25 per cent of NDTL of the banking system to 0.5 per cent with immediate effect

No surprises except the term repo bit. Most expected cap on LAF repo to be increased. Again, on one hand RBI is tightening policy and at the same time releasing additional liquidity in the markets.  Being hawkish and dovish at the same time does not work,,

There is hardly any analysis in this report. It is just a statement of facts and revised projections.

  • GDP growth revised lower to 5%
  • No mention of WPI projection which is really surprising. A fan chart is given which shows range in dark red from 6% to 7%.
  • CPI fan chart has been added which shows inflation at 8% – 9%. Policy stance likely to shift to CPI gradually…
  • There is nothing on core CPI, WPI..
  • The monetary projections have been given a miss which is a surprise. These serve as very useful indicators to assess monetary conditions. But has been excluded. The crisis shows central banks need to follow these trends in monetary conditions closely. Not sure why this was done. The idea should be to disclose more information.
  • There is no forward guidance statement either. It had become an important tool to guide policy. This was given a miss in mid q review as well.
  • There is no risk statement either where RBI lists the risks it sees ahead.
  • Nothing on fiscal policy and just a line on CAD.  It seems all the risks have become insignificant..

As expected there is large bit on banking and financial markets:

  • The scheme of subsidiarisation of foreign banks in India in order to reduce the risks they pose to the system while giving them the near national treatment promised in the past will be placed on our website within two weeks. It will be guided by the two cardinal principles of reciprocity and single mode of presence.
  • Inflation Indexed National Saving Securities (IINSSs) will be launched for retail investors in November/December 2013.

  • Guidelines on cash settled 10-year interest rate futures contracts will be issued by mid-November so that the product can be launched by the exchanges by end-December.

  • allow banks to offer partial credit enhancements to corporate bonds  by way of providing credit facilities and liquidity facilities to the corporates, and not by way of guarantee.

There are others as well which are a repeat of his first day statement.

There is this proposal to change timing of MSF:

With a view to facilitating settlement of electronic funds transfers as well as to reduce unnecessary volatility in reserve maintenance, it has been decided to:

  • revise the timing of MSF operations. With effect from November 5, 2013 they will be conducted between 7.00 pm and 7.30 pm instead of between 4.45 pm and 5.15 pm

7 to 7:30? Poor funding desk guys. With cap on Repo remaining, MSF window will be assessed. That means really long hours..  I really do not understand this timing. Another angle is RBI wants banks to manage borrowing via markets and access MSF in a very limited way. So you delay it to this crazy hour…

Further, Rajan talks of his five pillars of mon pol which he has spoken about earlier as well:

The  Reserve  Bank’s developmental measures over the next few quarters will be built on five pillars. These are:

a. Clarifying and strengthening the monetary policy framework.

b. Strengthening banking structure through new entry, branch expansion, encouraging new varieties of banks, and moving foreign banks into better regulated organisational forms.

c. Broadening and deepening financial markets and increasing their liquidity and resilience so that they can help absorb the risks entailed in financing India’s growth.

d. Expanding access to finance to small and medium enterprises, the unorganised sector, the poor, and remote and underserved areas of the country through measures to foster financial inclusion.

e. Improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery.

I am not sure what these will achieve. These are all things central banks do on sidelines. As a central banker the dharma is to first control inflation and then talk of these fancy things. The statement is largely silent on how RBI intends to fight inflation but the interest is more on things like frameworks, financial liberalisation etc.. Financial inclusion is important and RBI has been doing things on this front for a long time.  What is new about it? Much ado about nothing really..

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