Wednesday, Oct 22, 2014

Raghuram Rajan’s RBI keeps repo rate unchanged at 8%, reverse repo at 7%, slashes SLR by 0.5%

rbi-8 Raghuram Rajan had kept the RBI policy rate unchanged at 8 per cent at its April 1 review.
Press Trust of India | New Delhi | Posted: June 3, 2014 11:38 am | Updated: June 3, 2014 12:46 pm

Committed to keep inflation under check, RBI Governor Raghuram Rajan today left key rates unchanged and unlocked about Rs 40,000 crore of funds by reducing the amount of deposits banks are required to park in government securities.

This is the second time in a row that interest rates have been left unchanged amid demands for moderation to spur growth.

The repo rate, at which the Reserve Bank of India lends to banks, has been retained at 8 per cent, while the statutory liquidity ratio (SLR) for banks has been cut by 0.5 per cent to 22.5 per cent with effect from June 14.

The cash reserve ratio for banks has been kept unchanged at 4 per cent.

“At this juncture, it is appropriate to leave the policy rate unchanged, and to allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy,” Rajan said while unveiling the Second Bi-Monthly Monetary Policy Statement for 2014-15.

Consumer price index (CPI) inflation, excluding food and fuel, has moderated gradually since September 2013 although it is still elevated, he said.

Rajan, who has increased the repo rate thrice since September, said no more tightening would be warranted if the economy stays on a disinflationary course. He added that the RBI may also consider a cut if the disinflation process is faster than anticipated.

Rajan reiterated the RBI’s commitment to its target of getting CPI inflation, which accelerated to 8.59 per cent in April, down to 8 per cent by January 2015 and 6 per cent by the year after.

On growth, Rajan maintained the RBI’s median estimate of GDP expansion coming in at 5.5 per cent for this financial year.

The stance to be adopted by the Reserve Bank was keenly awaited, especially after the formation of a government perceived to be pro-growth at the Centre.

The RBI Governor met Finance Minister Arun Jaitley the day he took charge at North Block and also called on Prime Minister Narendra Modi before the release of data that showed the economy expanded 4.7 per cent in FY14 compared with 4.5 per cent in FY13.

However, the persistence of inflation, especially on the food front, was one of the factors considered detrimental for the RBI in being accommodative in its stance.

Fears of inadequate monsoon rains due to the El Nino factor may only add to price pressures in the future.

Rajan also announced a reduction in liquidity provided under the export credit refinance facility to 32 per cent of eligible export credit outstanding from 50 per cent earlier.

However, it introduced a special term repo facility of 0.25 per cent of net demand and time liabilities to compensate fully for the reduction in access to liquidity under export credit refinance with immediate effect.

COMMENTARY

RADHIKA RAO, ECONOMIST, DBS, SINGAPORE

The central bank’s tone has become more conciliatory on inflation risks and maintaining the growth-inflation balance. That continued…

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