India's central bank at its fourth bi-monthly monetary policy review on Tuesday has kept key policy interest rates unchanged. Dr. Raghuram Rajan, Governor, Reserve Bank of India (RBI) has decided to keep repo and reverse repo rate at 8% and 7% respectively.
Commenting on the policy, Rahul Goswami, CIO- fixed income, ICICI Prudential AMC said, ''In line with our expectations, RBI kept repo, reverse repo and MSF rates unchanged at 8%, 7%and 9% respectively. However, RBI came through with some positives on HTM and LCR norms for the banks.RBI looks more confident on meeting inflation targets of 8% by Jan'15 and pointed out some upside risks being receded towards achieving medium term CPI inflation target of 6% by Jan'16. RBI also mentioned that liquidity situation is structurally improving and the average daily net liquidity injection decreased from Rs 870 billion. in July to Rs 450 billion. during September. On growth, RBI expects gradual improvement to 5.4% in FY15 and 6.3% in FY16.
We expect CPI inflation to continue its benign trend with CPI headline inflation to be around 7.25% and the non-food CPI inflation to be near 6.25% by Jan'2015.Liquidity situation turning structurally positive is also a progressive indicator that will lead to short term rates falling down from their current levels. We believe that, with lower inflation, structural positive liquidity, stable currency, lower current account deficit and improving government finances, interest rates will be much lower from their current levels over the next two years. Therefore, we recommend investors to invest in duration funds for the long-term.''
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