The RBI governors stance in the mid term policy review seems to be measured with the bias still being towards softer interest rates inspite of no rate cut. Though the monetary measures undertaken might not reflect this sentiment, it is infact a prudent response to the current market conditions with the inflation rates being just above 5 per cent and the continued liquidity in the system. The RBI has stated that the monetary measures (bank rate, repo rate, CRR etc) will keep getting reviewed on an ongoing basis and any change in them will be a function of the prevailing market conditions and will not necessarily be addressed only through the credit policy. RBI has reviewed its earlier projection of 5.0-5.5 per cent inflation to 4.0-4.5 per cent on the back of good monsoons leading to recovery of agricultural production, comfortable stock of food grains and forex reserves and the absence of any pressure on oil prices with a reduction in geo-political tensions in the Middle-east. The benign inflation and the need to support investment demand may see a continued soft stance.
The proposed review of the Liquidity Adjustment Facility (LAF), which has recently been the monetary policy instrument of RBI for modulating system liquidity, will go a long way in providing flexibility and move within a corridor facilitating emergence of a short-term rupee-yield curve.
The measures of allowing short sale of Government Securities (subject to conditions), introduction of RTGS and operationalisation of STRIPS will deepen the bond market in the long run. However on the interest rate derivatives segment and their pricing, based on ZCYC, needs to be aligned to actual yields for the market to grow.
In keeping with the movement towards pure inter-bank call money market, the RBI further reduced lending limits of the non-banks to 60 per cent. Phasing out non-bank participants from the call money market is welcome as long as the RBI is able to ensure the development of a vibrant repo market for the non-banking institutions to park their overnight funds.