MUMBAI: Reserve Bank of India Governor Raghuram Rajankept the country’s key policy repo rate unchanged at 8 per cent on Tuesday, as widely expected, with consumer priceinflation coming down this year after a series of tightening steps by the central bank.
The central bank also took steps to increase the availability of credit, reducing the mandatory amount of bonds lenders must park at the RBI – called the statutory liquidity ratio – by 50 basis points to 22.5 per cent of deposits, starting in mid-June.
The central bank’s tone has become more conciliatory on inflation risks and maintaining the growth-inflation balance. That said, premature rate cuts are not in the picture as yet, as much depends on how the inflation outlook evolves. Against the backdrop of risks from weather conditions and a growth rebound that will narrow the output gap, the central bank will be keen to remain in a prolonged wait-and-watch mode.
In the meantime, inflation might be increasingly seen as a dual mandate of the government and the central bank. Once supply-side constraints are ironed out, the inflation trajectory will be more responsive tomonetary policy changes. The common agenda might persuade the government to adhere to fiscal consolidation goals along with administrative measures to minimize the backlash from a potentially weak monsoon. On its part, the RBI might defer further rate hikes if the impact of the El Nino shock proves to be milder than feared. As a base case, we look for the repo rate to plateau at 8 percent this year.
Rupa Rege Nitsure, Chief Economist, Bank Of Baroda, Mumbai
The policy is very consistent with what Raghuram Rajan has been saying right from the day he took over as governor. First, the linkage between CPI-based inflation and the repo rate is clearly and transparently maintained. Second is the SLR reduction, which also he had mentioned on his first day when he took over asRBI governor, in the spirit of long-term reforms.
Third is, removing the thrust on sector-specific measures like export credit refinance, and making money available from a broader window to improve transmission.
I would regard this policy as consistent with the underlying philosophy of the new governor, and also I think he has made the whole exercise more predictable and credible by today’s action.
By reducing SLR, he has indirectly shown his trust that the government will go ahead with fiscal consolidation.
Abheek Barua, Chief Economist, HDFC Bank, New Delhi
I would see it as a somewhat pro-growth policy…the SLR cut creates elbow room for banks to lend more freely, for broad investment demand to pick up. And that is clearly an expectation that there will be speedier execution of projects. I think it is sort of a pre-emptive move towards preventing any kind of tightness to build up in the credit cycle.
Shakti Satapathy, Senior Fixed Income Strategist, AK Capital, Mumbai
The tone is quite accommodative with a room for conditional policy easing based upon the disinflationary trend and the government’s effort in keeping the supply and fiscal on track. The cut in SLR and opening up of special term repo facility is an indication of ensuring liquidity driven growth intact. However, the impact of SLR cut on Indian government bonds seems restricted with historical higher holding in G-Sec by the market participants.
Going forward the government’s action plan would weigh the magnitude of disinflationary path thus in turn prompting the RBI in rate easing towards the second half of the fiscal.
Yogesh Agarwal, Managing Director, Ballarpur Industries
The decision to keep rates on hold was on expected lines but we would have been happier with a cut in the repo rate.
A rate cut at a time when there is all round optimism including from foreign investors would have lifted sentiment further and complimented the supply side and administrative measures that we expect from the central government.
While there are upside risks to inflation and the RBI must be on guard, yet the need of the hour is to provide the required boost to the sluggish economy by getting manufacturing capex and big ticket infrastructure projects going.
Miguel Chanco, India Economist, Capital Economics
The RBI left the repo rate unchanged, illustrating its commitment to curbing inflation despite the ailing economy.
Last week’s GDP data underlined how badly the economy needs a kick-start. However, the new government will get little help from the central bank, despite the RBI’s assertion today that it is prepared to cut rates if inflation falls more sharply than it expects.