The policy stance of the Reserve Bank of India (RBI) is relatively more hawkish than expected, given the indication that further actions on exceptional liquidity measures could be "two-way", contingent on exchange market stability. In this regard, the magnitude of NRI inflows attracted over the next two months would be critical for the direction of future rate actions by the RBI in light of uncertainty regarding the timing of QE taper and its impact on future FII flows.
Additionally, the RBI indicated that it would continue to monitor evolving growth-inflation dynamics and be ready to act pre-emptively, as necessary. In ICRA's view, with growth momentum expected to modestly revive led by agriculture and exports, the timing of Repo cuts would be dependent on the trajectory of inflation, which would be influenced both by food items and exchange rate movements.
We expect the cap of 0.5 percent of NDTL for access to the Liquidity Adjustment Facility (LAF) to be lifted over the course of Q3FY14 for the Repo rate to resume its role as the operational policy rate. ICRA expects the RBI to intervene and address tightness in systemic liquidity in the next quarter through open market operations (OMOs) as the Central Bank ruled out any further relaxation in the daily CRR requirement.
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