Comments on the RBI Policy & its Impact on Markets by Mr. Kiran Kumar Kavikondala, Director & CEO, WealthRays Securities

RBI maintained status quo on policy keeping inflation targets intact but cautioned on food inflation and base effect on headline number in coming months. RBI’s view on easing in core inflation gives some comfort. Also, RBI in its policy statement cautioned that food price shocks may strike inflation and hence it becomes necessary to see how monsoon unfolds. RBI has been persistent on fighting inflation. Easing core inflation from past rate hikes gives the view that more rate hikes are not anticipated in future and RBI will wait for substantial data which ,not distorted by base effect, on food inflation trajectory before easing liquidity.

Liquidity conditions remain balanced in market, with government finances improving and rising demand growth. The recourse of liquidity from RBI by daily net liquidity injection through LAF, term repo and MSF has decreased in September 2014, suggesting less liquidity pressure on banks. Also, RBI will continue 14 day term repos and daily overnight repos. Banking stocks are thus seen inching higher and focus could be on PSU banks.

RBI cuts ECR facility from 32% to 15% effective from 10th October. This may hurt export companies in short term. But given the fact RBI is following generalized provision of systematic liquidity, this move will help liquidity in economy. Rate sensitive like Auto and realty are expected to gain from the cautious optimism of RBI as further tightening in near future seems unlikely.

Global Crude prices being lower would help Indian economy in long run and its direct impact would help to curtail current account deficit & lower WPI, however food inflation continue to weigh on CPI data. Also, RBI GDP projections are in line with expectations at 5-6% real GDP growth in FY15 and 6.3% in FY16. Also, confidence on meeting 4.1% fiscal deficit target for FY15 should reinstate stability in markets going forward.