The Reserve Bank of India’s > third bi-monthly policy statement for 2014-15 has been on entirely expected lines. The policy repo rate has remained unchanged at 8 per cent. Consequently, there is no change in the rates which are pegged to it — the reverse repo stays at 7 per cent and the marginal standing facility (MSF) rate and the bank rate both continue to remain at 9 per cent. There has been no change in the CRR. Among monetary and liquidity measures, the only change of note — even this was anticipated — has been the reduction in the statutory liquidity ratio by 0.50 percentage points to 22 per cent. In the June bi-monthly statement, the SLR was reduced to 22.5 per cent. There are at least two reasons why the successive reductions in the SLR are significant. According to the RBI, the reduction in June was in anticipation of a recovery in economic activity. The Union Budget for 2014-15 which was presented subsequently renewed the government’s commitment to the medium-term fiscal consolidation road map. It also stuck to the interim budget’s fiscal deficit target of 4.1 per cent for the year. This opens up more avenues for bank lending to productive sectors of the economy as growth picks up. The more recent cut in the SLR is thus a demonstration of a welcome resolve on the part of monetary and fiscal authorities to work in tandem to achieve policy goals.
Reserve Bank Governor >Raghuram Rajan’s statement that the RBI is looking at newer avenues to support the real economy instead of depending on the “blunt” repo rate is pertinent. The reductions in the SLR are also seen as a move to converge towards global norms for statutory pre-emptions in banks. However, in India over the near term at least, the increased leeway that banks have may not translate into higher credit disbursements. Leading banks have invested more in SLR securities than what they are required to. Growth prospects have improved modestly. The deficit in the monsoons has narrowed recently and there has been a pickup in industrial activity. The ongoing fiscal consolidation can release resources for the private sector. Notwithstanding these and other favourable developments, the RBI has retained its April GDP growth forecast for the year at 5.5 per cent in a broad range of 5 to 6 per cent. The RBI remains committed to the disinflationary path of taking CPI inflation to 8 per cent by January 2015 and to 6 per cent a year later. The nearer term target looks achievable now, but it is critical to persist with the downward path over the medium term. Both growth and inflation are subject to many risks and monetary policy needs to adapt nimbly to the changing situation. For now, the Reserve Bank’s cautious approach is certainly justified.
