As was widely expected, the RBI kept its policy rate (repo rate) unchanged at 7.5% at today’s meeting. However, unlike at the previous meeting, when it cut the statutory liquidity ratio (SLR) by 50bp from 22.0% to 21.5%, the RBI kept the SLR, as well as the cash reserve ratio (CRR), unchanged.“We had expected a CRR cut in order to reduce banks’ cost of capital (money kept to satisfy the CRR yields nothing), thereby providing them with enough incentive to ensure faster transmission of monetary policy. We believe that a CRR cut would have proved more effective than an SLR cut and hence, in this regard, we were disappointed.” – said Societe Generale in a report on TuesdayThere was no reason for the RBI to cut given that inflation is showing signs of firming up as base effects wane and that there is an increased risk of inflation moving up after the recent spell of unseasonal rainfall, which is expected to lead to sizeable crop losses.“Going forward, the RBI will continue to be data dependent. While we currently expect two more rate cuts (of 25bp each) during 2015, developments on the inflation front will dictate whether there will be one or two cuts. A faster pick-up in inflation may reduce the probability of a second rate cut.” – Societe Generale
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