Bank Policy Tuesday: Rates unchanged, RBI targets FX exposure

As expected RBI did not give in to market and political pressure and kept the rate slider unchanged at 7-8-9 with 7% the Reverse Repo rate and 9% the rate for Emergency Borrowing ofr the MArginal Standing Facility for Banks. the 8% bank rate as expected as appeared as a whipsaw in the Equities and Fixed Income markets, 10 year bond rates back to 8.15% despite two successful auctions for INR 1.7 Tln in the last week or so and banknifty knealing at 11300 levels. 

RBI had earlier moderated its FY2013 forecast to 5.7% for GDP growth and 7.7% for WPI inflation from 6.3% and 7.3% respectively. Expected Fisc(Fiscal Deficit) has also moved up to 5.7%

RBI has also pushed guidelines asking for transparency in derivativees positions and currency exposure making loan sanctions contingent on the information after January 2013 and forcing corporates and banks themselves to consider firmwide strategies for currency beyond leaving Forex liabilities unhedged after deep losses cut into bank asset portfolios as well.

The Provision rate for so called standard assets that have been recast has been nearly doubled now to 2.75% , where earlier most banks did not provision these assets

Expected M3 growth is still a healthy 14% while RBI expects the interbank liquidity deficit to go down after the CRR cut infusion. Earlier FM P Chidambaram had built a new five year fiscal consolidation plan targeting a better  fisc of nearly 3% in FY 2017

Rate cuts may follow in the last quarter of FY 2013 only if inflation rates indeed soften in the Jan-Mar period before the incumbent government presents its last full budget.

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