RBI monetary policy: Five takeaways for stock market investors

The Reserve Bank of India governor Raghuram Rajan on Tuesday held steady on interest rates in RBI's third bi-monthly monetary policy statement of fiscal year 2016-17.

Rajan, whose term ends in September 4, maintained repurchase (repo) rate at 6.5 per cent. Repo rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds.

He has reduced policy rates by 150 bps since January.

The governor kept  the cash reserve ratio (CRR) of scheduled banks unchanged at 4 per cent.

"The RBI will continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent to a position closer to neutrality," said RBI in a statement.

Below is what Dalal Street should read into RBI policy:

1) Upside risks on inflation remain

The RBI belives consumer price index (CPI) inflation rose to a 22-month high in June beyond expectations. It also said pulses and cereals are rising and services inflation remains somewhat sticky. The RBI acknowlded if the current softness in crude prices proves to be transient, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation on good monsoon.

The full implementation of the recommendations of the 7th central pay commission (CPC) on allowances will affect the magnitude of the direct effect of house rents on the CPI, it said.

"On balance, inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017 with risks tilted to the upside, are retained," added RBI.

2) FCNR(B) redemptions to not hurt liquidity

The foreign-currency non-resident (FCNR) scheme for non-resident Indians matures in the month of September. A fresh rupee liquidity shortage may emerge then, if they redeem their deposits instead of rolling over.

"As regards the management of the imminent FCNR(B) redemptions, the Reserve Bank has been frontloading liquidity provision through open market operations and spot interventions/deliveries of forward purchases. The Reserve Bank will continue with both domestic liquidity operations and foreign exchange interventions that should also enable management of the FCNR(B) redemptions without market disruptions," said RBI.

The RBI will conduct an open market purchase auction on August 11, 2016.

3) On GST Bill

RBI believes the passage of the Goods and Services Tax (GST) Bill augurs well for the growing political consensus for economic reforms.

"While timely implementation of GST will be challenging, there is no doubt that it should raise returns to investment across much of the economy, even while strengthening government finances over the medium-term. This should boost business sentiment and eventually investment," said RBI.

The Lok Sabha on Monday agreed to the amendments moved to the Bill in the Rajya Sabha last week. With this, now the balls are in state governments' court as the Constitutional Amendment Bill requires the nod of at least 50 per cent of state assemblies for it to become a law. A GST Council will also be established to reach consensus on the final GST rate.

4) On demand scenario

The RBI acknowledged current accommodative stance of monetary policy and comfortable liquidity conditions should provide a congenial environment for the reinvigoration of aggregate demand conditions. However, it added, successive downgrades of global growth projections by multilateral agencies and the continuing sluggishness in world trade points to further slackening of external demand going forward.

5) On stressed assets

Rajan, in a press conference post policy review, said he is comfortable with the recognition process the banks have adopted on the stresses assets.

In order to strengthen the lenders' ability to deal with stressed assets, the RBI has issued a lot of schemes, the recent being 'Scheme for Sustainable Structuring of Stressed Assets'. Rajan said the attitude towards such schemes is changing, and banks are taking significant steps to fight the stressed assets.  

"Banks have enough tools with them, but the real issue is to use them. The important thing is to not go back to the old days of forbearance," said Rajan.