CB expects 7.2 percent growth in 2013

The continued easing of monetary policy throughout 2013 amidst low and stable inflation has brought about the desired macroeconomic outcome, Central Bank (CB) sources said. The monetary policy review of January 2014 issued by the Monetary Board said that available leading indicators show that real GDP growth is set to record around 7.2 percent growth for 2013.“Monetary aggregates moved towards the projected path.

Current and capital accounts of the Balance of Payments (BOP) improved, resulting in a stronger exchange rate and an international reserve position.

“Headline and core inflation moderated further, reaching 4.7 percent and 2.1 percent (YoY), in December 2013. Average headline and core inflation for 2013 was at 6.9 percent and 4.4 percent, compared to 7.6 percent and 5.8 percent in 2012,” the report said.

In view of these developments and expectations, the Monetary Board, has adopted the following monetary policy measures:

1. The Monetary Board will set up a Standing Rate Corridor (SRC) in place of the Policy Rate Corridor with immediate effect.

Accordingly, the following changes will take place:

a. The Standing Repurchase Facility will be renamed as Standing Deposit Facility (SDF), and the Standing Deposit Facility Rate (SDFR) will be the rate for the placement of overnight excess funds of the banking system.

b. The Standing Reverse Repurchase Facility will be renamed as the Standing Lending Facility (SLF), and the Standing Lending Facility Rate (SLFR) will be the rate for lending of overnight funds to the banking system.

c. Open Market Operation (OMO) auctions will continue unchanged, with Repurchase and Reverse Repurchase auctions, depending on liquidity conditions in the domestic money market.

2. The Monetary Board was of the view that providing collateral by the Central Bank to OMO participants under the Standing Deposit Facility was unnecessary, as the Central Bank is the monetary authority of the country.

Accordingly, in consideration of the Central Bank's zero credit risk in rupee transactions, the Monetary Board decided that from February 1, the Standing Deposit Facility will be uncollateralised. However, all other OMO transactions will remain collateral-based.

The Monetary Board also observed that the volatility in the interbank call money market has reduced substantially over time and that a compression of the Standing Rate Corridor was now warranted.

Accordingly, the Monetary Board reduced the Standing Lending Facility Rate of the Central Bank by 50 basis points to 8.00 percent with immediate effect, thereby compressing the Standing Rate Corridor to 150 basis points from 200 basis points. This compression will facilitate the reduction of the interest spread of banks over time, without affecting the deposit rates offered by banks to customers. The Monetary Board also reviewed the minimum cash margin requirement of 100 percent against Letters of Credit opened with commercial banks for the import of certain categories of motor vehicles, imposed on August 30, 2013. Considering the improvement in the external sector, the Monetary Board removed this requirement with immediate effect.