RBI plays waiting game

Reserve Bank of India Governor Raghuram Rajan takes a question from a journalist during a press conference in Mumbai, India, Tuesday, Aug. 5, 2014. India's central bank says it sees signs of recovery in Asia's third-largest economy even though the monsoon season, which is crucial for agriculture, had a weak start. (AP Photo/Rajanish Kakade)   | Photo Credit: Rajanish Kakade

Amid uncertainty over the progress of the monsoon and a likely increase in food prices, the Reserve Bank of India (RBI) has preferred to adopt a wait-and-watch approach. In line with the expectations, it has kept the key policy at current levels.

However, it has chosen to inject more liquidity into the system by reducing the minimum bond holding requirement by banks - Statutory Liquidity Ratio (SLR) - by 50 basis points.

“We are giving time to our financial institutions to adjust to the new economy,” said Governor Raghuram Rajan while addressing a press conference here..

In the last bi-monthly policy in June also the central bank cut SLR by 50 basis points from 23 per cent to 22.5 per cent. The RBI Governor said that it had reduced the SLR to 22.5 per cent “in anticipation of recovery in economic activity.”

“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,” he said.

Inflation and growth

However, RBI Governor said, “our stance has not moved from where we were last time ……Growth is lower than what one would like it to be and inflation is higher than what one likes it to be.”

“We will tighten it (policy) if inflation stays high and loosen the policy if it is on the downside. There is an issue of monsoon but we have to wait and see how it pans out. However, lower monsoon does not necessarily mean lower production and vice versa. Government is also keeping its eye on food production. If disinflation proceeds as warranted, we will eventually have room to cut rates,” he said.

“RBI will in no way hold rates high any longer than necessary. There is a path we are trying and want to achieve. We are not against growth but we think growth will be most benefited if we disinflate the economy,” Dr. Rajan said.

After hiking the repo rate to 8 per cent in January 2014, the RBI kept the rate unchanged as the inflationary pressures continued at higher levels. According to RBI Governor, the upside risks to the target of ensuring Consume Price Inflation (CPI) at or below 8 per cent by January 2015 remained, although overall risks were more balanced than in June. ``It is, therefore, appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged,’’ the Governor said.

Dr. Rajan pointed that inflationary risks also arose from pass-through of administered price increases, possibly higher oil prices stemming from geo-political concerns and exchange rate movement.

He said that the central bank would continue to monitor inflation developments closely, and remained committed to the disinflationary path of taking retail inflation (CPI) to 8 per cent by January 2015 and 6 per cent by January 2016.

While inflation, at around 8 per cent in early 2015, seemed likely, it was critical that the disinflationary process was sustained over the medium-term, said Dr. Rajan, adding, “the target of 6 per cent by January 2016, is still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialise.” In the months ahead, said Dr. Rajan, government actions on food management and ability to facilitate project completion should improve supply.

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Printable version | Jan 27, 2022 11:59:11 AM |

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