RBI maintains status quo on rates to fight inflation battle

Repo rate unchanged at 8%; SLR cut by 0.50% to 22%; retail inflation target fixed at 8% by Jan.

By: ENS Economic Bureau | Mumbai | Updated: August 6, 2014 9:01:22 am

Offering no relief to borrowers and the corporate sector, the Reserve Bank of India on Tuesday kept key interest rates unchanged as it opted to fight the “anti-inflation battle once” so that “we don’t have to fight” this battle again.

RBI Governor Raghuram Rajan, in his third straight policy review, expectedly kept the repo rate (policy lending rate) steady at 8 per cent and the cash reserve ratio (CRR) — the portion of deposits that banks keep with the RBI — at 4 per cent. However, it slashed the statutory liquidity ratio (SLR) — the portion of deposits kept in government bonds — by 50 basis points to 22.5 per cent to augment credit expansion in anticipation of an economic recovery and a rise in investments.

“The RBI in no way will hold rates high any longer than necessary,” Rajan told reporters after unveiling the third bi-monthly review. “Growth will be most benefited if we disinflate the economy and we don’t have to fight this fight again. Let’s fight the anti-inflation fight once and let’s win. That will create the best conditions for sustainable growth,” he said.

Bankers ruled out any cut in lending rates. “The RBI policy statement for August strikes a marginal hawkish tone … The 50 bps cut in SLR is not intended to trigger an interest rate cut,” said Arundhati Bhattacharya, chairperson, State Bank of India.

Rajan cautioned that the upside risks to the target of ensuring CPI (consumer price index) inflation at or below 8 per cent by January 2015 remain, although overall risks are more balanced than in June. The next goal was to bring inflation down to 6 per cent by January 2016, he said. “It is therefore appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged,” he said.

According to the Governor, with some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted.

On SLR reduction, Rajan said, “With the Union Budget for 2014-15 renewing commitment to the medium-term fiscal consolidation roadmap and budgeting 4.1 per cent 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.”

The RBI has estimated a real GDP growth of 5.5 per cent within a likely range of 5 to 6 per cent that was set out in the April projection for 2014-15. This will depend upon a pick-up in industrial activity in an environment conducive to the revival of investment and unlocking of stalled projects. “The past government and the current government have stated again and again they’re on the fiscal consolidation path. I don’t think there’s any reason to doubt it,” he said.

Meanwhile, to boost liquidity in the money and debt markets, the RBI also lowered the cap on the amount of debt banks can hold without marking to market to 24 per cent from 24.5 per cent, with effect from the fortnight beginning August 9.

… warns against witch-hunt of bankers, admits governance issues

Reserve Bank Governor Raghuram Rajan on Tuesday cautioned that the arrest of Syndicate Bank chairman in a bribery scandal should not lead to a “witch hunt” in the entire banking system. He, however, admitted that there are governance issues in public sector banks.

Rajan said the RBI has ordered the inspection of the books of public sector Syndicate Bank following the arrest of its chairman and managing director SK Jain for allegedly taking a bribe of Rs 50 lakh. “There is an inspection underway of Syndicate Bank but I think one has to be very careful about extrapolating this issue to entire banking system without thinking further through,” he said.

When asked whether the CBI has started collecting details of NPAs and debt restructured accounts, RBI Deputy Governor SS Mundra said the RBI is not aware of any such development. “I think balance has to be maintained and we have to be also careful. While we do thorough investigation and culprits are brought to book, it does not become a witch-hunt which then stalls the entire credit process,” Rajan said.

“It is important for an enforcement agency to ensure full investigation is done. I think they are doing that…,” Rajan said. “We need to again look at the governance of the public sector bank and understand the deficiency there and try and improve it,” he said. Acknowledging that there are lots of highly qualified people working in PSBs, he said “they should not be tarred with same brush”.

Rajan said the whole point of banking is about taking risks and using discretion in taking those risks. “You may trust (a customer) a little more, there is some chemistry that works, that’s relationship banking. For the outside to dictate that ‘this is the price you have to charge’ takes the banker out of the equation. In that case you might as well put a machine there and give loans. Some machines do that, but that is for small loans and that is called credit score. For large loans it is impossible to take out banker’s judgment.”

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