RBI review fineprint: Pay commission report to add fiscal stimulus to demand

Besides the 50 basis points repo rate cut, the RBI’s bimonthly monetary policy review contained a lot of insights into the state of the domestic economy, its reading of the global headwinds and also a bird’s eye view of the current policy environment. Excertps:-

MAIN HIGHLIGHTS

* Repo rate cut by 50 bps to 6.75%

* Banks' CRR left unchanged at 4.0% of NDTL

* To continue providing liquidity under variable repos

* Reverse repo rate adjusted to 5.75%

* MSF rate, bank rate adjusted to 7.75%

* Banks' CRR left unchanged at 4.0% of NDTL

* Banks' deposit rates have reduced significantly

* To continue daily repos, reverse repos to smoothen liquidity

* Final norms on marginal cost Base Rate computation by Nov-end

* To align SLR, HTM cap on gilts starting from Jan 9 fortnight

* To cut HTM cap on gilt by 50 bps to 21.5% from Jan 9 fortnight

* After Jan 9, to cut SLR by 25 bps per qtr till March 2017

* After Jan 9, to cut HTM cap on gilts by 25 bps/qtr till Mar'17

* Have frontloaded 50 bps cut in repo rate

* Policy stance to continue to be accommodative

* Fall in bank deposit rates suggest further transmission possible

* To work with govt to ensure banks pass on past rate cuts



INFLATION

* As projected, CPI inflation has dropped to 9-month low

* Food inflation contained by govt's resolute supply mgmt

* Disinflation has been broadbased

* Inflation excluding food, fuel has come off June's peak

* Inflation likely to go up from Sept for a few months

* Favourable base effect seen reversing Sept onwards

* Expect January CPI inflation at 5.8%

* 6% CPI inflation target for Jan "likely to be achieved"

* Focus must now move to cutting CPI inflation to 5% by Mar 2017

FISCAL

* Key that proactive supply management by govt be in place

* Pass-through of rupee depreciation will be monitored

* Underlying econ activity weak on sustained export fall

* Underlying econ activity weak on rainfall deficiency

* Commodity prices will remain contained for a while

* Govt has reaffirmed desire to meet fiscal deficit aims

* Govt has reaffirmed desire to improve spending quality

* Liquidity conditions eased considerably Aug to mid-Sep

* Widening trade gap may push up Jul-Sep CAD modestly

* Cos can issue rupee bonds overseas with 5-yr maturity

* Foreign rupee bond issue within $51 bln corp debt cap

* Non-bks, PDs can take long-positions in when-issued mkt

* To allow banks to take short positions in when-issued mkts

* No curb on end use of foreign rupee bond issue proceeds

* Standalone PDs can deal in currency futures on bourses

* Norms on standalone PDs' currency futures deals Nov end

* To launch exchange-traded currency F&O in 3 cross pairs

* Exchange-traded currency F&O in euro-dlr, sterling-dlr

* Exchange-traded currency F&O also in dlr-yen

* CCIL member can short-sell gilt to its gilt acct holder

* CCIL member can treat buy from gilt acct holder as cover deal

* To up FX hedge cap for residents in OTC mkt to $1 mln

* To up FPI gilt invest cap in phases to 5% of stock by Mar 2018

* To fix FPI debt invest limit in rupee terms from now

* FPI gilt invest cap hike to give extra 1.2-trln-rupee limits

* FPI invest in state loans to also be increased in phases

* To up FPI state loan invest cap to 2% of stock by March 2018

* To announce increase in FPI debt invest cap every Mar, Sep

* Increased FPI debt invest cap to be released every quarter

* To increase FPI invest cap in debt on Oct 12 and Jan 1

* To hike FPI gilt invest limit by 130 bln rupee each Oct, Jan

* To separately list FPI medium-term framework debt invest norm

* To cut risk weight on low-value, collateralised home loans

* 90 fincl help applications from cos to up depositors interest

* View on converting urban co-op bks to commercial bks by Mar

GROWTH

* Cut FY16 output growth forecast to 7.4% vs 7.6% before

* Since Aug, most conditions for further easing been met

* Econ recovery far from robust

* Rural demand remains subdued

* Manufacturing has exhibited uneven growth in Apr-Jul

* Tentative recovery of economy under way

* Govt supply mgmt must ward off any food prices pressures

GLOBAL

* US Federal Reserve has postponed policy normalisation

RBI REPORT

* Coming pay commission report may add fiscal stimulus to demand

* Invest may respond more strongly on more easing certainty

* Global, domestic macro conditions have changed since Apr

* Change in conditions warrant change in forecast assumptions

* Lower oil prices have assuaged domestic inflation

* Lower oil prices have supported domestic demand

* Lower oil prices have helped contain fiscal gap, CAD

* High volatility the new normal in global fincl markets

* Overall, global risks have heightened significantly

* Impact of sub-par, uneven south-west monsoons still unfolding

* Purchasing managers' indices indicate softening of inflation

* See CPI inflation in September rising to around 4.5%

* See CPI inflation averaging 5.5% in Oct-Dec

* See CPI inflation averaging 5.8% in Jan-Mar

* See CPI inflation averaging 5.5% in FY17

* See CPI inflation moderating to 4.8% in Jan-Mar 2017

* Baseline inflation outlook subject to considerable uncertainty

* Outlook for investment demand remains lacklustre

* Prospects for exports appear muted given external environ

* Apr-Jun's agri recovery unlikely to sustain in Oct-Mar

* Factored deficient monsoons into baseline projections

* Pre-emptive step worked to moderate food inflation so far FY16

* Pulses price rose so far FY16 on last year's production fall

* Protein-rich item exhibited persistent price pressure

* Price pressure on protein-rich item on demand-supply mismatch

* WPI, CPI divergence widened to 870 bps by August 2015