RBI keeps repo rate unchanged, cuts SLR to improve liquidity

The Reserve Bank of India (RBI) has decided to hold policy rates again in its bi-monthly monetary policy review, on Tuesday, as widely anticipated.

It kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8 per cent while the cash reserve ratio (CRR) of scheduled banks have been retained at 4 per cent of net demand and time liabilities (NDTL). Consequently, the reverse repo rate under the LAF will remain unchanged at 7 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9 per cent.

But it cut the statutory liquidity ratio (SLR) of banks by 50 basis points from 22.5 per cent to 22 per cent of their NDTL with effect from the fortnight beginning August 9, 2014 which would increase liquidity in the market.

The central bank noted that the moderation in consumer inflation for two consecutive months, despite the seasonal firming up of prices of fruits and vegetables since March, is due to both base effects and the steady deceleration in consumer inflation excluding food and fuel.

It said that 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. But added that there are upside risks to prices.

“Accordingly, the upside risks to the target of ensuring CPI inflation at or below 8 per cent by January 2015 remain, although overall risks are 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,” RBI said.

RBI said the prospects for reinvigoration of growth have improved modestly and if the recent pick-up in industrial activity is sustained with ongoing fiscal consolidation releasing resources for private enterprise, external demand picking up and international crude prices stabilising, the central estimate of real GDP growth of 5.5 per cent within a likely range of 5 to 6 per cent that was set out in the April projection for 2014-15 can be sustained.

The central bank said that sentiment on domestic economic activity appears to be reviving, with incoming data suggesting a firming up of industrial growth and exports and its own industrial outlook survey also points to improvement in business expectations in Q2.

However, it noted that leading indicators of the services sector are mixed, although there are early signs of modest strengthening of corporate sales and business flows.

“While the initial slow progress of the monsoon and its uneven spatial distribution raised serious concerns regarding agricultural production, these have been mitigated, though not entirely dispelled, by the pick-up in the monsoon through much of the country in July. The implementation of government policy actions that have been announced should create a congenial setting for a steady improvement in domestic demand and supply conditions,” it said.

(Edited by Joby Puthuparampil Johnson)

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