Raghuram Rajan gives PM Narendra Modi a boost, keeps RBI repo rate unchanged, cuts SLR by 0.5%

Written by PTI | New Delhi | Updated: Jun 4 2014, 00:07am hrs
Raghuram rajanPM Narendra Modi with RBI Governor Raghuram Rajan at 7, Race Course Road in New Delhi. (PTI)
Reserve Bank of India Governor Raghuram Rajan kept the country's key policy repo rate unchanged at 8 percent on Tuesday, as widely expected, with consumer price inflation coming down this year after a series of tightening steps by the central bank.

While Raghuram Rajan kept key policy rate on hold on Tuesday, he has eased rules to spur bank lending in a move set to be welcomed by the new pro-business PM Narendra Modi government as it seeks to revive economic growth.

The Reserve Bank of India, which kept interest rates on hold at 8 percent as widely expected, also hinted it would not raise rates as long as inflationary pressures continued to ease.

The loosening in credit and the central bank's surprisingly dovish remarks on inflation will put the onus on the new government to stick to conservative fiscal spending and broader reforms to get Asia's third-largest economy back on track, economists said.

The decisions from the RBI were widely seen as pragmatic moves. Raghuram Rajan has placed fighting inflation at the top of his agenda, for which he will need the support of Narendra Modi, India's popular new prime minister.

In turn, investors are hopeful the new government will respond by narrowing the fiscal deficit and tackling the supply-side factors that drive up food inflation in India, thus easing the burden on the poor and restoring investors' confidence.

"If the economy stays on this course, further policy tightening will not be warranted," Raghuram Rajan said in the RBI statement, referring to the moderating inflation trend.

The central bank governor added that the Modi-led victory in elections last month could help "create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth."

The governor's dovish tone on inflation sparked a rally in bonds and raised expectations the central bank could even ease monetary policy as early as this year.

The benchmark 10-year bond yield was trading at 8.60 percent at 0930 GMT, down 13 basis points from the day's high after earlier hitting a more than four-month low. The yield had closed at 8.66 percent on Monday.

Rajan's increased comfort on consumer price inflation - which cooled in 2014 from the near 10 percent level in the two previous years - could allow him to take steps to improve growth after raising interest rates by a total of 75 basis points since September. Its last tightening move was in January.

Analysts say a concerted effort by the government could help the RBI meet its target to bring down CPI inflation to 8 percent by January 2015 and 6 percent the following year.

Although the RBI has a wide latitude in setting monetary policy, it is not statutorily independent and has to consult with the finance minister before taking a decision.


On Tuesday, the RBI supported the Modi government in bolstering growth by enhancing credit available by banks.

The RBI announced a reduction in the mandatory amount of bonds lenders must park at the central bank - called the statutory liquidity ratio (SLR) - by 50 basis points to 22.5 percent of deposits, starting in mid-June.

The RBI also reiterated its focus on further developing money markets as a key way to ensure cash in the banking system flows to productive sectors, moving away from its piecemeal approach to injecting liquidity or to specific sectors.

Among the measures on Tuesday, the RBI reduced the liquidity provided to exporters while pledging to provide additional cash via term repos - or cash for loan transactions.

"The central bank is aware that the economy needs an impetus and the RBI is ensuring through its measures today that liquidity remains a potent tool to revive growth in the real economy," said Soumya Kanti Ghosh, chief economic adviser at State Bank of India.

It also relaxed rules on overseas remittances, allowing Indians to move up to $125,000 from $75,000 after the exchange rate stabilised. The central bank also allowed foreign investors to participate in domestic exchange traded currency derivatives.

The Royal Bank of Scotland said in a research note the increase in annual remittances and trading rules reflected the RBI's confidence on India's external position.

The concerted efforts by Rajan are likely to be welcomed by Modi and his government, after the Bharatiya Janata Party trounced the Congress party in elections last year with a pledge to create jobs and revive an economy that has grown below 5 percent for two consecutive years.

But Modi, and his finance minister Arun Jaitley, will need to deliver as they face a slew of potentially competing challenges, from containing price pressures to upholding fiscal discipline.

A key signal of its intentions will be known mostly in July when the new government is set to unveil a new budget.


* Short-term lending (Repo) rate unchanged at 8 pc

* Cash reserve ratio (CRR) unchanged at 4 pc

* SLR cut by 0.50 pc to 22.5 pc to unlock banking funds

* Expect economic growth for 2014-15 to be between 5-6 pc

* Further policy tightening will not be warranted if inflation continues to decline

* Reiterates CPI inflation target of 8 pc by January 2015, 6 pc by 2016

* Decisive election results should help bring in gradual recovery of growth

* Farm sector outlook clouded by forecast of delay in monsoon

* Export credit refinance facility cut to 32 pc from 50 pc

* FPIs allowed in currency derivative market

* Indians as well as non-residents can carry up to Rs 25,000 while leaving country

* This facility not valid for citizens of Pakistan and Bangladesh

* Next bi-monthly policy statement on August 5

*Hikes eligibility limit for forex remittances to USD 1,25,000, from USD 75,000 at present.

RBI keeps rates unchanged, unlocks Rs 40,000 cr of bank funds

(PTI) Committed to keep inflation under check, RBI Governor Raghuram Rajan today left key rates unchanged and unlocked about Rs 40,000 crore of funds by reducing the amount of deposits banks are required to park in government securities.

This is the second time in a row that interest rates have been left unchanged amid demands for moderation to spur growth.

The repo rate, at which the Reserve Bank of India lends to banks, has been retained at 8 per cent, while the statutory liquidity ratio (SLR) for banks has been cut by 0.5 per cent to 22.5 per cent with effect from June 14.

The cash reserve ratio for banks has been kept unchanged at 4 per cent.

"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 while unveiling the Second Bi-Monthly Monetary Policy Statement for 2014-15.

Consumer price index (CPI) inflation, excluding food and fuel, has moderated gradually since September 2013 although it is still elevated, he 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.

Rajan 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.

On growth, Rajan maintained the RBI's median estimate of GDP expansion coming in at 5.5 per cent for this financial year.

The stance to be adopted by the Reserve Bank was keenly awaited, especially after the formation of a government perceived to be pro-growth at the Centre.

The RBI Governor met Finance Minister Arun Jaitley the day he took charge at North Block and also called on Prime Minister Narendra Modi before the release of data that showed the economy expanded 4.7 per cent in FY14 compared with 4.5 per cent in FY13.

However, the persistence of inflation, especially on the food front, was one of the factors considered detrimental for the RBI in being accommodative in its stance.

Fears of inadequate monsoon rains due to the El Nino factor may only add to price pressures in the future.

Rajan also announced a reduction in liquidity provided under the export credit refinance facility to 32 per cent of eligible export credit outstanding from 50 per cent earlier.

However, it introduced a special term repo facility of 0.25 per cent of net demand and time liabilities to compensate fully for the reduction in access to liquidity under export credit refinance with immediate effect.



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 to monetary 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.


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 as RBI 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.


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.


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.


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.


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.

Overall, we see no reason to change our view that rates will not be cut until Q4, and only then if the RBI is confident of meeting its near-term inflation target. Even when rate cuts start to come into the picture, any easing is unlikely to be aggressive, given the central bank's desire to see inflation fall to around 4 percent over the long run.


The direction as per RBI policy means the central bank would now gradually develop term money market. It has provided special term repo facility of 0.25 percent of banks' deposits to compensate for lower export credit refinance. This means term repo facility now stands at 1 percent of net demand and time liabilities or roughly 800 billion rupees, which will be available to banks thought auction route. India will see its term money curve developing.

SLR cut signifies that RBI thinks banks' money should be free to be deployed and credit cycle will pick up.

Government is also determined to address supply side issues via project clearance, support to manufacturing sector, potential release of food grains.

We may see lower inflation and lower rates in third and fourth quarter of current year.


"The hawkish tone has remained absent in this policy while the risks have been acknowledged in terms of uncertain monsoon having impact on food, but a larger emphasis has been laid on the government's ability to address management of both supply shocks on food and improving governance, therefore creating a better supply side environment.

"With an anticipated fiscal consolidation in store, I think we have probably seen for the first time, a statement which says that if disinflationary trend appears, it could also provide headroom for easing in policy stance. So I think this is the first time and all this essentially emanates from a strong government's capability of comprehensively addressing the supply side constraints as the year progresses. I would think a large part of the statement has been more towards co-ordination between the fiscal and monetary policy."


They definitely appear slightly more dovish compared to the last policy. They have brought back the language (in the policy statement) that if inflation remains below the indicated trajectory adjusted for base effect it will open up room for easing. This is a statement which is different from April and is indicative of a slight softening of stance.

The banking system is already sitting on an statutory liquidity ratio that is well above the statutory minimum. As long as credit growth continues to remain on the weaker side banks would have a higher amount of SLR as compared to the statuary minimum. This will come in to play when the cycle recovers and the credit growth picks up, at which stage banks will have higher amount of lendable reserves.

What's encouraging is that the process of unwinding some of the extraordinary steps taken in last July-August is continuing, so more and more of liberalisation is back on their agenda.


The SLR cut is somewhat a surprise, rest has come along expected lines. It looks like both the government and RBI are on the same page ahead of monsoon. The government needs to work on supply-side issues and huge non-performing loans at public sector banks.

I expect the central bank governor to work closely with the government and may be even guide it on supply-side issues. Also, measures on rupee are positive signal for foreign investors.


The governor is concerned about India's growth slowdown. He is fine with current inflation trajectory. Cutting SLR shows he is worried about credit offtake, which is not picking up. Only negative is SLR cut has come amid rising government bond yield This shows we are somewhere at the end of the tightening cycle.

If government along with RBI reduces supply pressure by handling subsidies, and taking short-term measures by releasing food grains in godowns, then RBI will be happy. The governor on his part would now look at easing liquidity crunch by keeping on reducing SLR to 20 percent in the long term.

Bond yields may stabilise around 8.50 percent if there is a good monsoon.


The benchmark 10-year bond yield briefly rose to 8.70 percent from 8.65 percent before the policy, after RBI announced a 50 bps cut in banks' statutory liquidity ratio from June 14 fortnight.

However, the yield retreated to pre-policy levels to be down 1 bp on day on the back of a dovish tone in the policy.

The partially convertible rupee trimmed losses to 59.16 per dollar after the RBI kept rates unchanged and took steps to increase availability of credit.

The benchmark BSE share index extended gains after the central bank left policy rates unchanged.


- India's annual consumer price inflation in April accelerated to a three-month high of 8.59 percent, mainly driven by higher food prices.

- India's industrial production shrank for a second straight month in March, falling 0.5 percent from a year earlier, dragged down by weak consumer demand and capital investments.

- Reserve Bank of India governor Raghuram Rajan last week said that both the government and the central bank have expressed the need to bring down inflation, while respecting the fact that economic growth is "very weak."

- Asia's third-largest economy grew 4.7 percent in 2013/14, slower than an official estimate of 4.9 percent and higher than 4.5 percent growth a year earlier. It marks the second straight year of sub-5 percent growth - the worst slowdown in more than a quarter of a century.

PREVIEW: RBI may maintain status quo in June 3 policy review

The Reserve Bank of India was expected to leave the key interest rate unchanged in its June 3 monetary policy review as Governor Raghuram Rajan was thought likely to prefer containing stubborn inflation before conceding to demands for a rate cut to boost growth.

Raghuram Rajan had kept the policy rate unchanged at 8 per cent at its April 1 review as inflation, especially of food items, hovered at over 8 per cent. Food inflation in April stood at 9.66 per cent and retail inflation was at 8.59 per cent.

The bi-monthly policy review on June 3 will be the first after Prime Minister Narendra Modi assumed office on May 26.

"RBI is likely to maintain status quo as inflation is still high and there is threat of monsoon being weak this time looming large," Indian Overseas Bank Chairman and Managing Director M Narendra told PTI.

An emerging risk on the inflation front is the likelihood of a deficient monsoon, which could lead to a surge in food inflation and affect growth adversely.

The India Meteorological Department (IMD) has indicated a 60 per cent probability of El Nino this year along with a below-normal monsoon.

The RBI has increased the key repo rate three times since Rajan took over as Governor in September.

According to DBS, "The RBI reiterated that inflation control was a priority and the bank will also attempt to balance growth-inflation objectives. We look for the repo to be left unchanged next week (June 3)."

After meeting new Finance Minister Arun Jaitley last week, Rajan said fighting price increases is a priority and the central bank has always maintained a balance between the need to check inflation and prop up growth.

India's economic growth stayed below 5 per cent for the second year in a row at 4.7 per cent in 2013-14. Growth remained subdued at 4.6 per cent in the fourth quarter.

Foreign lender RBS said while keeping rates unchanged in the policy review, the RBI could gradually ease liquidity conditions in the inter-bank market, which in turn could allow for lower cost of borrowings.

However, industry bodies are clamouring for a rate cut to boost growth.

Assocham said the low level of wholesale inflation of items such as wheat, pulses, vegetables and oilseeds would give extra room to the RBI to be accommodative.

"Governor's job would become much easier as he along with others can see much higher level of commitment to reduce the inflation, both at the WPI and retail level," Assocham president and Yes Bank Managing Director Rana Kapoor said.

Wholesale inflation of food products under manufactured items is under 2 per cent, while items such as sugar, edible oils and cement and lime have shown a negative trend, it said.