The Reserve Bank of India (RBI) on Tuesday preferred to keep long-term as well as short-term indicative rates at the current level despite rising inflation and inflationary pressure.

However, aiming at reducing liquidity and fighting the inflationary expectations, the RBI raised the Statutory Liquidity Ratio (SLR) — the portion of deposits that banks are required to keep in government securities — by 100 basis points to 25 per cent with effect from November 7.

“We are concerned about inflation and managing inflation expectations,” said RBI Governor D. Subbarao while addressing a press conference here, reviewing the second quarter of Monetary Policy 2009-10.

The projection for inflation at end-March 2010 is placed at 6.5 per cent with an upward bias. This is higher than that of 5 per cent inflation projected in July. However, the growth projection for Gross Domestic Product (GDP) has been retained at 6 per cent with an upward bias, unaltered from that made in the July review

“The RBI is mindful of its fundamental commitment to price stability,” said Dr. Subbarao, adding that, “the precise challenge for the RBI is to support the recovery (economy) process without compromising price stability.”

It retained the long-term indicative rate, the Bank Rate, at 6 per cent. The short-term indicative rates — the repo rate and the reverse repo rate — also kept unchanged at 4.75 per cent and 3.25 per cent, respectively, and the Cash Reserve Ratio (CRR) of banks unchanged at 5 per cent. The repo rate is the rate at which the RBI provides liquidity to banks and the reverse repo rate is the rate at which the RBI absorbs liquidity from banks.

Indicating that the policy tightening is imminent, the RBI Governor said, “there is a case for tightening (monetary policy) sooner rather than later.” The RBI’s inflation expectations survey shows that households expect inflation to increase over the next three months as also one year, especially in the case of food items. But premature tightening “will hurt the growth impulses.” Apart from raising the SLR to the pre-crisis (financial) level of 25 per cent, the limit for the export credit refinance facility, which was raised to 50 per cent of eligible outstanding export credit, is being returned to the pre-crisis level of 15 per cent.

Further the two unconventional refinance facilities — special refinance facility for banks and special term repo facility for scheduled commercial banks for funding to mutual funds, non-banking financial companies (NBFCs), and housing finance companies — are being discontinued with immediate effect.

Among regulatory measures, the RBI increased the provisioning requirement for advances to the commercial real estate sector classified as ‘standard assets’ from 0.4 per cent to one per cent.

Highlights of RBI Credit Policy

RBI raises statutory liquidity ratio by 100 bps to 25%

Keeps other key rates unchanged

Retains GDP growth projection for FY'10 at 6%

Sees inflation at 6.5% by March-end

Aims to contain inflation at 4-4.5 %

To announce third quarterly review in January.

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