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

The Reserve Bank of India was expected to leave the key interest rate unchanged...

rbi-8 Raghuram Rajan had kept the RBI policy rate unchanged at 8 per cent at its April 1 review.

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.



The central bank’s tone has become more conciliatory on inflation risks and maintaining the growth-inflation balance. That said, premature rate cuts are not in the picture as yet, as much depends on how the inflation outlook evolves. Against the backdrop of risks from weather conditions and a growth rebound that will narrow the output gap, the central bank will be keen to remain in a prolonged wait-and-watch mode.

In the meantime, inflation might be increasingly seen as a dual mandate of the government and the central bank. Once supply-side constraints are ironed out, the inflation trajectory will be more responsive to monetary policy changes. The common agenda might persuade the government to adhere to fiscal consolidation goals along with administrative measures to minimize the backlash from a potentially weak monsoon. On its part, the RBI might defer further rate hikes if the impact of the El Nino shock proves to be milder than feared. As a base case, we look for the repo rate to plateau at 8 percent this year.


The policy is very consistent with what Raghuram Rajan has been saying right from the day he took over as governor. First, the linkage between CPI-based inflation and the repo rate is clearly and transparently maintained. Second is the SLR reduction, which also he had mentioned on his first day when he took over as RBI governor, in the spirit of long-term reforms.

Third is, removing the thrust on sector-specific measures like export credit refinance, and making money available from a broader window to improve transmission.

I would regard this policy as consistent with the underlying philosophy of the new governor, and also I think he has made the whole exercise more predictable and credible by today’s action.

By reducing SLR, he has indirectly shown his trust that the government will go ahead with fiscal consolidation.


I would see it as a somewhat pro-growth policy…the SLR cut creates elbow room for banks to lend more freely, for broad investment demand to pick up. And that is clearly an expectation that there will be speedier execution of projects. I think it is sort of a pre-emptive move towards preventing any kind of tightness to build up in the credit cycle.


The tone is quite accommodative with a room for conditional policy easing based upon the disinflationary trend and the government’s effort in keeping the supply and fiscal on track. The cut in SLR and opening up of special term repo facility is an indication of ensuring liquidity driven growth intact. However, the impact of SLR cut on Indian government bonds seems restricted with historical higher holding in G-Sec by the market participants.

Going forward the government’s action plan would weigh the magnitude of disinflationary path thus in turn prompting the RBI in rate easing towards the second half of the fiscal.


The decision to keep rates on hold was on expected lines but we would have been happier with a cut in the repo rate.

A rate cut at a time when there is all round optimism including from foreign investors would have lifted sentiment further and complimented the supply side and administrative measures that we expect from the central government.

While there are upside risks to inflation and the RBI must be on guard, yet the need of the hour is to provide the required boost to the sluggish economy by getting manufacturing capex and big ticket infrastructure projects going.


The RBI left the repo rate unchanged, illustrating its commitment to curbing inflation despite the ailing economy.

Last week’s GDP data underlined how badly the economy needs a kick-start. However, the new government will get little help from the central bank, despite the RBI’s assertion today that it is prepared to cut rates if inflation falls more sharply than it expects.

Overall, we see no reason to change our view that rates will not be cut until Q4, and only then if the RBI is confident of meeting its near-term inflation target. Even when rate cuts start to come into the picture, any easing is unlikely to be aggressive, given the central bank’s desire to see inflation fall to around 4 percent over the long run.


The direction as per RBI policy means the central bank would now gradually develop term money market. It has provided special term repo facility of 0.25 percent of banks’ deposits to compensate for lower export credit refinance. This means term repo facility now stands at 1 percent of net demand and time liabilities or roughly 800 billion rupees, which will be available to banks thought auction route. India will see its term money curve developing.

SLR cut signifies that RBI thinks banks’ money should be free to be deployed and credit cycle will pick up.

Government is also determined to address supply side issues via project clearance, support to manufacturing sector, potential release of food grains.

We may see lower inflation and lower rates in third and fourth quarter of current year.


“The hawkish tone has remained absent in this policy while the risks have been acknowledged in terms of uncertain monsoon having impact on food, but a larger emphasis has been laid on the government’s ability to address management of both supply shocks on food and improving governance, therefore creating a better supply side environment.

“With an anticipated fiscal consolidation in store, I think we have probably seen for the first time, a statement which says that if disinflationary trend appears, it could also provide headroom for easing in policy stance. So I think this is the first time and all this essentially emanates from a strong government’s capability of comprehensively addressing the supply side constraints as the year progresses. I would think a large part of the statement has been more towards co-ordination between the fiscal and monetary policy.”


They definitely appear slightly more dovish compared to the last policy. They have brought back the language (in the policy statement) that if inflation remains below the indicated trajectory adjusted for base effect it will open up room for easing. This is a statement which is different from April and is indicative of a slight softening of stance.

The banking system is already sitting on an statutory liquidity ratio that is well above the statutory minimum. As long as credit growth continues to remain on the weaker side banks would have a higher amount of SLR as compared to the statuary minimum. This will come in to play when the cycle recovers and the credit growth picks up, at which stage banks will have higher amount of lendable reserves.

What’s encouraging is that the process of unwinding some of the extraordinary steps taken in last July-August is continuing, so more and more of liberalisation is back on their agenda.


The SLR cut is somewhat a surprise, rest has come along expected lines. It looks like both the government and RBI are on the same page ahead of monsoon. The government needs to work on supply-side issues and huge non-performing loans at public sector banks.

I expect the central bank governor to work closely with the government and may be even guide it on supply-side issues. Also, measures on rupee are positive signal for foreign investors.


The governor is concerned about India’s growth slowdown. He is fine with current inflation trajectory. Cutting SLR shows he is worried about credit offtake, which is not picking up. Only negative is SLR cut has come amid rising government bond yield This shows we are somewhere at the end of the tightening cycle.

If government along with RBI reduces supply pressure by handling subsidies, and taking short-term measures by releasing food grains in godowns, then RBI will be happy. The governor on his part would now look at easing liquidity crunch by keeping on reducing SLR to 20 percent in the long term.

Bond yields may stabilise around 8.50 percent if there is a good monsoon.


The benchmark 10-year bond yield briefly rose to 8.70 percent from 8.65 percent before the policy, after RBI announced a 50 bps cut in banks’ statutory liquidity ratio from June 14 fortnight.

However, the yield retreated to pre-policy levels to be down 1 bp on day on the back of a dovish tone in the policy.

The partially convertible rupee trimmed losses to 59.16 per dollar after the RBI kept rates unchanged and took steps to increase availability of credit.

The benchmark BSE share index extended gains after the central bank left policy rates unchanged.


– India’s annual consumer price inflation in April accelerated to a three-month high of 8.59 percent, mainly driven by higher food prices.

– India’s industrial production shrank for a second straight month in March, falling 0.5 percent from a year earlier, dragged down by weak consumer demand and capital investments.

– Reserve Bank of India governor Raghuram Rajan last week said that both the government and the central bank have expressed the need to bring down inflation, while respecting the fact that economic growth is “very weak.”

– Asia’s third-largest economy grew 4.7 percent in 2013/14, slower than an official estimate of 4.9 percent and higher than 4.5 percent growth a year earlier. It marks the second straight year of sub-5 percent growth – the worst slowdown in more than a quarter of a century.

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