The Reserve Bank on Tuesday kept interest rates unchanged but unlocked about Rs. 40,000 crore of banking funds by cutting the SLR and promised to ease rates if inflation softens at a faster pace.
This is the second consecutive time that RBI Governor Raghuram Rajan has kept interest rates unchanged, belying hopes of any reduction in EMIs for home and auto loans.
The repo rate, at which the RBI lends to banks, has been retained at 8 per cent and the cash reserve ratio (CRR) has been kept unchanged at 4 per cent.
The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must park at the RBI, has been cut by 0.5 per cent to 22.5 per cent of their net demand and time liabilities (NDTL) with effect from June 14.
Commenting on the RBI policy, Finance Minister Arun Jaitley said the central bank has adopted a “calibrated approach” in its bi-monthly monetary policy.
“At this juncture, it is appropriate to leave the policy rate unchanged, and to allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy,” Rajan said.
Rajan, who has increased the repo rate thrice since September, said no more tightening would be warranted if the economy stays on a disinflationary course. He added that the RBI may also consider a cut if the disinflation process is faster than anticipated.
Industry chambers hailed the apex bank’s move to slash SLR, saying it will give banks more room for onward lending to the corporate sector.
The BSE Sensex surged 173.74 points to end at fresh closing peak of 24,858.59 points.
On growth, Rajan maintained the RBI’s median estimate of GDP expansion coming in at 5.5 per cent for this financial year.
Commenting on the RBI policy, State Bank of India Chairperson Arundhati Bhattacharya said the SLR of banks exceeds the current required proportion and the reduction in the level will not have an immediate effect.
It is a signal for liquidity easing, she said, adding that interest rates are unlikely to go down in the short term.
Consumer price index (CPI) inflation, excluding food and fuel, has moderated gradually since September 2013, although it is still elevated, Rajan said.
He reiterated the RBI’s commitment to its target of getting CPI inflation, which accelerated to 8.59 per cent in April, down to 8 per cent by January 2015 and 6 per cent by the year after.
ICICI Bank Managing Director Chanda Kochhar said: “The decision to hold rates reflects the current level of inflation as well as the expectation of policy and administrative actions from the government in the coming months to address inflation as well as boost growth.”
The stance to be adopted by the RBI had been keenly awaited, especially after the formation of a government perceived to be pro-growth at the Centre.
Further, encouraged by an improvement in the forex market, the RBI raised the annual overseas investment ceiling for individuals to USD 125,000 from USD 75,000.
The apex bank also permitted all residents and non-residents, except citizens of Pakistan and Bangladesh, to carry up to Rs. 25,000 in Indian currency notes while leaving the country.
The current limit for carrying domestic currency notes for Indians travelling overseas is Rs. 10,000.
To enhance depth in the foreign exchange market, the RBI allowed foreign portfolio investors to participate in the domestic exchange-traded currency derivatives market, a segment where volumes have declined.
The central bank reduced the availability of funds under the export credit refinance window from 50 per cent of export credit outstanding to 32 per cent.