Warning that poor southwest monsoon this year could pose risks to both growth and inflation, RBI Governor Raghuram Rajan keeps repo rate on hold for 3rd time in row
Mumbai : In its third bi-monthly policy, the Reserve Bank of India gave no respite to borrowers for the third time in a row and kept its key policy rate unchanged saying that it has to remain vigilant to the impact of deficient monsoon on the price situation.
RBI Governor Raghuram Rajan, however, lowered the Statutory Liquidity Ratio, the portion of deposits that banks are required to keep in government bonds, and the limit on held-to-maturity portfolio of government securities by 50 basis points to unlock about Rs 40,000 crore into the system.
With these measures, banks’ SLR requirement will be at 22.0% of net demand and time liabilities, and the cap on held-to-maturity portfolio will be at 24.0%. This is the second consecutive cut in banks’ SLR requirement.
“With the Union Budget for 2014-15 renewing commitment to the medium-term fiscal consolidation roadmap and budgeting 4.1% of GDP as the fiscal deficit for the year, space has opened up further for banks to expand credit to the productive sectors in response to its financing needs as growth picks up,” RBI said in its policy statement.
Rajan said there are upside risks to inflation in view of uncertain monsoon and its impact on food production as also volatile international oil prices. The southwest monsoon, which started poorly, has improved since mid-July. As on Monday, the cumulative rainfall in the season that started on Jun 1 was 21% below normal at 388.4 mm.
“It is…appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged,” he said. Accordingly, the repo rate will continue to stand at 8 per cent, the reverse repo at 7 per cent and the cash reserve ratio at 4 per cent. The bank rate would remain at 9 per cent.
The CPI inflation rate fell to a two-and-a-half year low of 7.31% in June, primarily on account of fall in non-food item prices.
However, it highlighted upside risks also in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions, and their impact on food production. A likely rise in crude oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints could also pose upside risks to inflation, the central bank said.
Going forward, the RBI expects government actions on food management and to facilitate project completion to improve supply but cautioned that with consumer and business confidence pick-up, the aggregate demand would also strengthen. However, the central bank added that it would act as necessary to ensure sustained disinflation.
The Finance Ministry on its part suggested that going forward the RBI should examine the liquidity situation, inflation and growth while fixing the policy rate. “The Governor, RBI has already stated that RBI will not hold interest rates high any longer than is necessary and if disinflation proceeds as warranted, there will eventually be room to cut rates,” the statement said.
Markets appeared to have reacted positively to the RBI policy. Benchmark Sensex rose by 185 points as investors cheered RBI’s move to give more funds to banks for lending. The rupee also ended nine paise higher at 60.84 against the US dollar.
Rajan hinted at more SLR cuts in the future in tandem with the government actions on the fiscal deficit front to help lenders plan for the long-term.
CII Director General Chandrajit Banerjee said, “At a time when industrial growth continues to be sluggish, CPI-based inflation is moderating and above all, inflation risks are gradually abating due to improvement in monsoon conditions, the RBI could have taken this opportunity to effect a cut in interest rates.” Rajan said the SLR cut is not aimed at a reduction in the lending rates but is more of a tool to help banks plan better. RBI is concerned about the growth but wants to first take inflation down to have long-term sustainable growth, he said.
On the intent of the policy action, Rajan said the central bank is trying to enhance the supply side of the economy by providing adequate liquidity, even while arresting any demand side pressures by bringing down the cost of funds by cutting lending rates.