Highlights of RBI's Q2 monetary policy review

MUMBAI: RBI's second quarter review of monetary policy 2013-14 has many highlights. Repo or short-term lending rate has been increased by the RBI by 0.25 per cent to 7.75 per cent, whereas cash reserve ratio has remained unchanged at 4 per cent.

Marginal standing facility (MSF) rate was cut by 0.25 per cent to 8.75 per cent, that narrows the difference between repo and MSF rate to 1 per cent. Repo rate hike is due to the upturn of inflation, and other factors. RBI expects wholesale inflation to be higher than current levels and warrants 'appropriate policy response'. Retail inflation is also expected to hover around 9 per cent.

RBI believes food price pressures will ease only with the arrival of summer crop harvest and seasonal moderation. Prospect of delay in taper of US Fed Reserve's bond purchases has brought calm to financial markets, and normalcy will be restored in the forex market only when OMCs fully return to the market for their demand.

Besides, RBI has also revised its GDP growth forecast for the FY14 to 5 per cent, from the earlier estimates of 5.7 per cent. Growth is likely to pick up in the second half on expected good show in exports and agriculture. RBI also expects liquidity pressures building on the small businesses as large entities are holding onto payments, and suggested remedies that lie in speeding-up of Government and PSU payments.

Average drawdown from MSF has declined to Rs 0.4 trillion by mid-Oct, down from a high of Rs 1.4 trillion in mid-Sep. Final guidelines on unhedged forex exposures by corporates to be out by December.

Jalan panel constituted to screen applications for new bank licenses will hold its first meeting on Nov 1, and decision of RBI on in-principle approvals will be final.