There are two significant takeaways from the Reserve Bank of India’s bi-monthly monetary policy statement of Tuesday, that has held rates steady. First, it signals continuity in policy, dispelling apprehensions that the RBI might come under pressure from the new government to change course in the matter of setting rates. Despite prodding from industry bodies, the central bank has chosen to hold on to rates for the time being until inflationary expectations, especially on the food front, calm down. In fact, it could be argued that the RBI has been kind by not raising rates given that retail inflation has rebounded in the last couple of months, but then such a move would have been too hawkish in the face of continuing sluggishness in the economy. The central bank has balanced its standstill policy on rates with a neutral tone in its stance, which is the second important takeaway from the statement. The risks to achieving the target of 8 per cent consumer price inflation (CPI) by January 2015 are balanced, says the central bank. And then comes the promise: “If the economy stays on this course, further policy tightening will not be warranted.”

In line with the recommendations of the Dr. Urjit Patel Committee to move away from sector-specific refinance to a more generalised system for providing liquidity, the policy has reduced export credit refinancing for banks from 50 per cent of outstanding export credit to 32 per cent. This has been balanced with a special term repo facility of 0.25 per cent which will compensate for the reduction in liquidity due to the former step. This is an important reform measure that will improve access to liquidity for banks without having to go through formalities such as providing documentary evidence of export credit and so on. The reduction in the statutory liquidity ratio (SLR) by 0.50 percentage points is an interesting move and in line with what the Governor, Raghuram Rajan, had hinted in a speech a couple of weeks ago. The attempt seems to be to increase credit availability, especially for infrastructure lending, but the question to ask is: how much impact will it have in the absence of a rate cut? This could well be a first step, though, to further loosening of SLR as the government turns its focus to giving a boost to infrastructure investment. Dr. Rajan clearly seems to have adopted a cautious wait-and-watch attitude for now, expecting the government to take measures to control food prices and rein in inflation. Also on watch will be the government’s commitment to fiscal consolidation and its plans to promote growth, both of which will be evident in the upcoming Budget. These factors, along with the performance of the monsoon, may well set the trend for the next policy move of the central bank.

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