As expected, the Reserve Bank of India maintained status quo on the repo rate (the rate at which it provides short-term liquidity to the banking system), saying that bringing inflation down would create the best conditions for sustainable growth.
However, it cut the statutory liquidity ratio (SLR) — the slice of deposits that banks have to compulsorily invest in Government securities — to 22 per cent from 22.5 per cent, thus giving banks more money to lend when credit demand picks up.
Among others, the reasons cited by the central bank for holding the repo rate are: continuing uncertainty over the monsoon and its impact on food production; the possibility of higher oil prices due to geo-political concerns and exchange rate movements, and the imperative to strengthen growth in the face of continuing supply constraints.
In its three bi-monthly policy statements so far in the financial year, the RBI has kept the repo rate steady at 8 per cent. The central bank, however, cut the SLR from 23 per cent to 22.5 per cent of deposits in its June bi-monthly policy statement.
Bank deposit and lending rates are likely to stay at current levels.
The S&P BSE Bankex, a benchmark index comprising stocks of 12 banks, rose by 0.28 per cent as the SLR cut will put more funds for lending at banks’ disposal, which is more remunerative than investing in bonds. Overall, the BSE Sensex closed 0.72 per cent up at 25,908.01 points.
Governor Raghuram Rajan said that if disinflation proceeds as warranted, the RBI would eventually have room to cut rates. He emphasised that the RBI would not hold rates high any longer than necessary.
Disinflationary path “There is a path (disinflation) we are trying to achieve and we want to achieve that path. We are not against growth but we do think that growth will be most benefited if we disinflate the economy and we don’t have to fight this fight again.
“Let’s fight the anti-inflation fight once and let’s win; that will create the best conditions for sustainable growth,” he told the media after announcing the monetary policy statement.
Even as it reiterated its commitment to disinflation, the RBI cautioned that there are challenges in realising its target of achieving consumer price index (CPI)-based inflation of 8 per cent or below by January 2015.
Pointing out that the RBI is steering monetary policy in a very difficult environment, the Governor said, “It is difficult in the sense that growth is lower than one would like it to be … while inflation is higher than one would like it to be.”
On the SLR cut, the RBI Governor observed that it has to be recognised that the economy itself is changing and Indian financial institutions have to be given the space to adjust to this.
“So, to give them the space to deal with the new economy, we have to steadily think about bringing it down. The SLR cut is not intended to make loans cheaper today. It is to give banks more flexibility on their balance sheet as credit growth picks up,” said Rajan.