Mumbai, June 3: The Reserve Bank of India (RBI) today left key policy rates unchanged but indicated that the monetary policy stance could be eased if inflation fell faster than anticipated.
Moreover, in a pro-active step that could signal its optimism that the domestic economy was in for a turnaround, the RBI reduced the amount of funds that banks must compulsorily park in government securities.
Called the statutory liquidity ratio (SLR) in banking parlance, it is the proportion of deposits that must be invested in these securities.
The RBI brought down SLR by 50 basis points to 22.5 per cent — the intention was to make more funds available to the banking system so that they can be lent to companies.
The reduction will potentially release Rs 40,000 crore into the banking system.
Ahead of the monetary policy, experts had projected that RBI governor Raghuram Rajan was unlikely to tamper with any of the key rates as the inflation threat remained. The RBI maintained the repo rate at 8 per cent and the cash reserve ratio (CRR) at 4 per cent.
The repo is the rate at which the central bank provides liquidity to banks, while CRR is that portion of deposits that must be maintained with the RBI.
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Rajan also provided some hope on the growth front for the new government, which has inherited an economy that grew 4.7 per cent in 2013-14.
In a dovish guidance, the RBI said it remains committed to keeping the economy on a disinflationary course by taking retail 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,’’ it observed.
Experts said that while the SLR cut did come as a surprise, it could have been done to bring in more fiscal discipline at the Centre.
However, Madan Sabnavis, chief economist at CARE Ratings, said the reduction would not have an immediate impact as actual SLR is more than the stipulated level.
The RBI retained its earlier projection that India’s GDP will grow between 5 per cent and 6 per centin 2014-15 from 4.7 per cent in 2013-14.
Describing the RBI’s status quo policy as a calibrated approach to strike a balance between growth and inflation, finance minister Arun Jaitley today said the government on its part would address the problem of price rise by improving supplies.
Bankers today said the RBI’s decision to hold key rates was on expected lines and interest rates won’t change even though the central bank’s SLR cut infused additional liquidity into the system.
Welcoming the decision to cut SLR, India Inc today said the move would reduce the asset liability of banks and thereby ease liquidity.
Chandrajit Banerjee, CII’s director-general, said the policy announcement has shifted the spotlight back on growth while restraining inflationary pressures on the economy.
Ficci, while appreciating the RBI’s move, said a cut in the key lending rates would have encouraged investments.
“After this policy, our hopes are hinged on the forthcoming budget for reviving growth,” said Sidharth Birla, president of Ficci.
Assocham president Rana Kapoor said the country must move towards a regime of benign interest rates to boost consumer demand and industrial growth.
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