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

The RBI Governor Raghuram Rajan has cut the statutory liquidity ratio by 50 basis points to 21.5  per cent in a bid to spur banks to inject more credit into the economy.

 PTI   
  • Mumbai,  February 3, 2015  
  • |  
  • UPDATED   19:20 IST
RBI Governor Raghuram Rajan
RBI Governor Raghuram Rajan (Photo: Reuters)

The Reserve Bank of India on Tuesday left interest rates unchanged saying there was no substantial development on inflation or fiscal fronts to warrant a fresh reduction.

This stance follows a surprise rate cut by RBI on January 15 to tackle disinflationary pressure.

"Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the RBI to await them and maintain the current interest rate stance", RBI Governor Raghuram Rajan said in the sixth bi-monthly monetary policy statement.

Accordingly, the RBI left the short-term lending rate or repo rate at 7.75 per cent and the cash balance requirement on the lenders or CRR at 4 per cent.

But to help exports sector, which of late has been struggling following more headwinds in the global economy, the central bank has decided to replace export credit refinance facility with the provision of system level liquidity with effect from February 7.

Also, RBI slashed Statutory Liquidity Ratio (SLR), a percentage of funds banks have to necessarily park with RBI, by 50 basis points to 21.5 per cent.

On inflation, the policy document took consolation in the declining trend and noted that even the upturn in December turned out to be muted relative to projections.

Heightened volatility in global financial markets, including through the exchange rate channel, also constitute a significant risk to the inflation assessment.

Looking ahead, inflation is likely to be around the target level of 6 per cent by January next.

Talking about the path of inflation in 2015-16, Rajan said: "The Reserve Bank will keenly monitor the revision in CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements."

Despite fiscal deficit touching 99 per cent by November, the Governor said he was confident that the government will not miss the budgeted 4.1 per cent target.

On the surprise 25 bps rate cut on January 15, he said the decision was led by falling inflationary expectations and data on weak commodity prices and muted rural wage growth.

"Having committed in public statements to initiate a change in the monetary policy stance as soon as incoming data permitted, the Reserve Bank cut the policy rate on January 15", he added.

Referring to economic growth, RBI said that though revision in the base year for GDP and calculation methods will mean some revision in GDP growth numbers for 2014-15 as well as in the forecasts, growth expectations should be tempered.

Domestic activity is likely to have remained subdued in Q3 of 2014-15, mainly reflecting the shortfall in the kharif harvest relative to a year ago but agricultural growth is likely to pick up in Q4 with the late improvement in the north-east monsoon and in rabi sowing.

Nevertheless, growth expectations should be tempered as lead indicators such as tractor and motorcycle sales and slowing rural wage growth all point to subdued rural demand, RBI's monetary policy document said.

However, it noted that there is improvement in business confidence as visible from a pick-up in new investment intentions, especially in transportation, power and manufacturing.

RBI estimated the current account deficit (CAD) for 2014- 15 at 1.3 per cent of the GDP, significantly lower than the earlier projection.

The CAD has been comfortably financed by net capital inflows, mainly in the form of buoyant portfolio flows but also supported by foreign direct investment inflows and external commercial borrowings.

Accordingly, there was accretion to India's foreign exchange reserves to the tune of $6.8 billion in Q3, RBI said.