India Monetary Policy Review – January 2014

At its Quarterly Monetary policy review on the 28th of January 2014, the Reserve Bank of India (RBI) raised the Repo rate by 25bp to 8%, and simultaneously raised both the MSF (Marginal Standing Facility Rate) and Reverse Repo Rate by 25bp to 9% and 7% respectively.

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  • At its Quarterly Monetary policy review on the 28th of January 2014, the Reserve Bank of India (RBI) raised the Repo rate by 25bp to 8%, and simultaneously raised both the MSF (Marginal Standing Facility Rate) and Reverse Repo Rate by 25bp to 9% and 7% respectively.
  • Whilst headline CPI and WPI came down due to softer food prices, Core CPI remained elevated around 8%, reflecting underlying price stickiness. The high Core CPI compelled the RBI to act.
  • The Urjit Patel Committee recommended that a Headline Inflation target of 4% +/- 2% should be the primary target of monetary policy within 2 years. Such a move would, however, require legislative approval.
  • India’s economy remains weak, with industrial production contracting by 2% over the year to November, driven largely by weakness in manufacturing.
  • The trade figures are very encouraging and indicate that the trade deficit for the April-December 2013 period was 25% lower than a year ago. Further, the Current Account Deficit is expected to be well, contained within 2.5% of GDP for the 2013-14 period, almost half of what it was a year ago.
  • India’s external vulnerability is lower than countries such as Turkey and South Africa, which have high Current Account Deficits.
  • India’s external funding needs have significantly benefited from the USD 34bn of inflows due to special measures such as the Concessional Swap facility for FCNR(B) deposits.
  • NAB Economics is forecasting the RBI to keep the Repo rate on hold at 8% till the end of the 2014-15 Financial Year, as the RBI observes the impact of recent rises.

For further analysis download the full report.