• At its Quarterly Monetary policy review on the 20 of July, the Reserve Bank of India (RBI) cut the MSF rate by 75bps, whilst raising the Repo and Reverse Repo rates by 25basis points.
• The Cash Reserve Ratio was held at 4%, but the minimum daily balance was reduced from 99% to 95%.
• The decision reflects an increasing focus on anchoring inflationary expectations while easing liquidity, amid an improved external backdrop.
• Another key objective was to increase household financial savings. This is an astute measure as it will lessen current account vulnerabilities.
• The Indian economy remains weak, although there have been positive developments on the trade front.
• Inflationary pressures have risen, with the Wholesale Price Index reflecting the pass through of a lower exchange rate. The RBI is attaching increasing importance to the Consumer Price Index, and is uncomfortable with its current high level.
• The Indian Rupee has been assisted by RBI measures to provide concessional swap rates to banks to attract NRI deposits, a measure expected to draw in USD 10 billion. Foreign Institutional Investors have become net buyers of Indian securities during September, reversing the net selling trend over June-August.
• NAB Economics has altered its interest rate outlook. We now expect one to two more rate hikes, which would push up the Repo rate between 7.75-8% (previously 6.75-7%) to reflect the anti-inflationary focus of the new RBI Governor, Raghuram Rajan. The MSF rate is expected to fall, and the gap between the Repo rate and MSF rate is forecast to narrow to 100bp.

For further analysis download the full report.

• India Monetary Policy Review – September 2013 (PDF 233 KB)