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RBI keeps key rates unchanged, cuts SLR by 50 basis points

Special Correspondent
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Nearly Rs.40,000 crore will be infused into the banking system

Raghuram Rajan
Raghuram Rajan

In a move that would clearly provide banks more headroom to lend money, the Reserve Bank of India, on Tuesday, reduced the Statutory Liquidity Ratio (SLR) by 50 basis points to 22.5 per cent with effect from the fortnight beginning June 14.

This measure is likely to infuse around Rs.40,000 crore into the banking system.

In its bi-monthly monetary policy statement, however, the RBI kept the indicative policy rate (repo rate) and the Cash Reserve Ratio (CRR) unchanged at 8 per cent and 4 per cent, respectively, considering the ‘current and evolving macroeconomic situation’.

“A reduction in the required SLR will give banks more freedom to expand credit to the non-government sector. However, the Reserve Bank is also cognisant of the significant on-going financing needs of the government. Therefore, the SLR is reduced by 0.50 per cent (50 basis points), with any further change dependent on the likely path of fiscal consolidation,” said the RBI.

The SLR is the portion of deposits banks are required to maintain in the form of gold or government securities before providing credit to customers. The CRR is the portion of total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank, and the repo rate is rate at which the central bank lends money to banks.

Sluggish economic activity

The RBI said the lead indicators pointed to continuing sluggishness in domestic economic activity in the first quarter of 2014-15. “The outlook for agriculture is clouded by the meteorological department’s forecasts of a delay in the onset of the south-west monsoon with a 60 per cent chance of the occurrence of El Nino,” it said in its bi-monthly monetary policy statement.

The ongoing contraction in the production of consumer durables and capital goods, coupled with moderation in corporate sales and non-oil non-gold imports, is “indicative of continuing weakness in both consumption and investment demand.”

“The decisive election result, together with improved sentiment should, however, create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth during the course of the year,” said the RBI in its first policy statement after the regime change at the Centre.

Retail inflation, measured by the consumer price index (CPI), increased for the second consecutive month in April, pushed up by a sharp spike in food inflation, especially in the prices of fruits, vegetables, sugar, pulses and milk. CPI inflation, excluding food and fuel, has moderated gradually since September, 2013, although it is still elevated.

“At this juncture”, said the RBI, “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.”

The RBI said that it is committed to keeping the economy on a disinflationary course, taking CPI inflation to 8 per cent by January, 2015, and 6 per cent by January, 2016.

“If the economy stays on this course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance.”

In April, the RBI said, the trade deficit narrowed sharply due to resumption of export growth after two consecutive months of decline, and the ongoing shrinking of import demand. “Robust inflows of portfolio investment, supported by foreign direct investment and external commercial borrowings, kept external financing conditions comfortable and helped add to reserves,” the RBI noted.

On a hopeful note the RBI said that the outlook for the agricultural sector is contingent upon the timely arrival and spread of the monsoon. “Easing of domestic supply bottlenecks and progress in the implementation of stalled projects should brighten the outlook for both manufacturing and services. The resumption of export growth is a positive development and as world trade gathers momentum, the prospects for exports should improve further.”


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