RBI Mid-Term Credit Policy - A Review

On October 29th, the RBI released its mid-term credit policy. The markets immediately reacted with cheer and scaled record highs. Below we highlight the important points of the policy and explain what it means for us in general.

The Policy :

• CRR remains unchanged at 4%
• Repo rate up 0.25% to 7.75%.
• Reverse repo adjusted to 6.75%.
• MSF cut by 0.25% to 8.75%. This has restored the normalcy again after the drastic steps taken to contain rupee volatility. the gap between repo rate and MSF is again restored to 100 basis points.
• Limit for term repo of 7 and 15 days increased from 0.25% to 0.50% of NDTL. This roughly translates into 40000Cr and gives a liquidity boost.
• Cuts GDP growth forecast to 5% from 5.5%.

Insights We Can Get :

• It is clear from the policy that inflation remains a concern for the RBI. Hence, the high interest rate regime will be maintained until such time the spiral of price rise is not contained at comfortable levels. 
• The RBI seems to have regained comfort on the currency front. Hence, normalcy has been restored by the cut in MSF and repo is once again the key rate of the banks.
• The RBI has tried to walk a tightrope by maintaining high interest rates to curtail inflation, but at the same time taking steps to improve the liquidity situation and give some space for growth.

Our Take-Home :

By prioritising inflation, RBI has indicated that the interest rates will remain high as long as the inflation is high. It is now imperative for other stakeholders, namely the govt., to act and take steps to curb the inflation.
Fast clearances and revival of stalled infrastructure projects and easing of other supply side bottlenecks are some steps that the govt. can take to boost investment sentiment and improve economic activity.
The markets gave a big positive response to the RBI policy because, if nothing else, the RBI policy was according to expected lines and no unexpected surprises were present. Also, by making its intentions clear some predictably about the actions of the central bank is now instilled.
The interest rates will be high until such time inflation is not down to comfortable levels. The markets, as well as the RBI will be waiting for the govt. to keep up the momentum and curtail inflation by taking proper steps.
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