Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Decoding the RBI Credit Policy (Jun 2014 Edition)


The RBI Credit Policy for June 2014 makes no changes to interest rates. The Repo rate is at 8% and limited to 0.25% of the total banking liabilities – called the Net Demand and Time Liabilities (NDTL). This is the rate at which banks borrow overnight from the RBI.

(Read more about the details on what these terms mean in our Primer by Dheeraj Singh)

Reverse repo – at which banks place money with the RBI – is at 7%. The Marginal Standing Facility is at 9%.

Export Credit Refinance Lowered

Apart from the Repo and MSF, banks could refinance credit to exporters, upto half their exposure. That 50% has been cut to 32% immediately.

This is on the basis of the Urijit Patel committee report that RBI shouldn’t promote specific sectors (like exports) and provide fungible liquidity for all.

This won’t be having as much of an impact as one imagines. We don’t have current data on Export Credit Refinance, only data till march. In March the limit was 56,800 cr. and banks has used up 41,000 cr. The limit should now be around 35,000 cr.

Of more recent times, banks have been using much lesser of the Special Refinance facilities (which includes things like Forex Swap refinance and support to Primary dealers). For instance the total special refinance taken yesterday was

But that impact has been mitigated by:

Increase in Term Repo to 1% of NDTL

There’s now term repo – 7 to 14 day borrowing instead of overnight, at an auctioned rate of interest – upto Rs. 60,000 cr. which is 0.75% of NDTL.

To compensate for the reduction in export credit refinance, we’re going to see another special term repo of 0.25% of NDTL, taking the total term repo amount to 1%. The additional term repo amount will be around Rs. 20,000 cr. (200 billion).


SLR Cut to 22.5%

Banks are required to buy government bonds with a percentage of the money they take as deposits. That percentage is the SLR – the Statutory Liquidity Ratio.

The SLR percentage has been brought down from 23% to 22.5%. This will reduce the SLR requirement of banks by about Rs. 40,000 cr.

However, not much impact again, as banks have way higher government bonds than they are required to hold. They currently have over 28% in SLR securities. (They should have a little more because they want to use it for emergency borrowing, but at 5% more, it’s ludicrously huge)

So, not much of an impact in the short term.

Gloat: My prediction was spot on. Of course I also thought they will increase government bond investment limits for foreigners but that did not happen. But I’ll take the credit – no one else seems to have predicted that. (end gloat)

FPIs and Domestic Companies Allowed to Speculate to $10m in Currency Exchanges

Beyond hedging requirements, Foreign investors can trade upto $10 million more in currency requirements. This is good news for those wanting to trade the currency.

The facility has also been extended to domestic companies. Individuals could anyhow do what they wanted. So this levels the playing field.

(And this is the most important part of the credit policy)

Foreign Investment Limits for Indians Increased to $125K from $75K

Indians can invest abroad upto $125K per year. What is specifically important is their note that this is “with no end use restrictions, except for margin trading, gambling etc”.

Does this mean you can now buy real estate abroad? You couldn’t do that, after RBI restrictions in August 2013. We don’t yet have clarity – they’ve promised more details in a notification.

Otherwise, no big impact, because this is not a majorly utilized limit anyhow.

You can take Rs. 25,000 out in INR

Increased from Rs. 10,000.

Not that you can do much with it outside India. (Hint, RBI, Hint!)

Exports Have Gone Further Up in April, Trade Deficit Narrows More

They say:

In April 2014, the trade deficit narrowed sharply due to resumption of export growth after two consecutive months of decline, and the ongoing shrinking of import demand. Robust inflows of portfolio investment, supported by foreign direct investment and external commercial borrowings, kept external financing conditions comfortable and helped add to reserves.

And The RBI Does Some Sarcasm

Finally, we seem to have a sense of humour in central bank statements:

With the unwinding of year-end window dressing, the corresponding decline in the size of excess CRR holding of banks as well as the sharp decline in Government cash balances with the Reserve Bank as a result of Government expenditure, liquidity conditions improved significantly in April and May 2014.

Banks often demand cash at the end of the year to make their books look good (and improve CASA ratios and the like). While this is known, it’s nice to see the RBI sees it for what it is – window dressing.


The 10-year yield has fallen a bit to 8.61% – which means bond prices have gone up. The rupee though, has fallen to 59.28 which is about a 15 paise drop today.

Stocks are up but banks are down. Maybe they expected more for banks.

And the awesome thing: the RBI has achieved a good part of its one goal of clarifying monetary policy. We are easily able to predict rate movements, because they have a clear stand on things.

But the negative is that there is no word on payment banks, or any of the other stuff I’ve mentioned in my post. It might be that the RBI places less of a need to clarify this in bimonthly policy, but will do them ad-hoc when required. If that is the case I think that’s a great idea. I hate the concept of having to do things only once in two months. That’s also why I hate the concept of a planning commission (and the five year plans). We need thoughtful action and sometimes it doesn’t have to wait for that two month window to pass.

So, predictable, boring policy, which is exactly what you want.


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial