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The RBI Governor Raghuram Rajan stayed put on the key policy rates in his third bi-monthly credit policy review today. This was on expected lines.
Repo rate or the rate at which RBI lends money to banks for short-term, stayed at 8 per cent while the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities.
The RBI has decided to reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5 per cent to 22.0 per cent of their NDTL with effect from the fortnight beginning August 9, 2014; and continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.
On inflation
Explaining its monetary policy stance, the RBI said in its statement that the recent moderation in CPI headline inflation for two consecutive months was due to base effects and deceleration in CPI inflation excluding food and fuel. It noted that the the recent fall in international crude prices, the benign outlook on global non-oil commodity prices and still-subdued corporate pricing power should all support continued disinflation, as should measures undertaken to improve food management.
The RBI, however, cautioned that upside risks remain (although more balanced than in June) in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints. It is, therefore, appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged, the RBI said.
Firm on fiscal consolidation
Explaining the decision to cut the Statutory Liquidity Ratio (currently at 22.5%) by 0.50%, the RBI said that the renewed commitment to the medium-term fiscal consolidation roadmap and budgeting 4.1 per cent of GDP as the fiscal deficit for the year in the union Budget announced last month had opened up space further for banks to expand credit to the productive sectors in response to its financing needs as growth picks up. Accordingly, the SLR is reduced by a further 0.5 per cent of NDTL, the RBI said.
Concurrent with the reduction in SLR, and in order to enhance liquidity in the money and debt markets the RBI is also bringing down the ceiling on banks’ total holdings of SLR securities in the (held to maturity category (HTM), from 24.5% of their net demand and time liabilities to 24%.
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