1. Ahead of Budget 2015, Raghuram Rajan’s RBI snubbed key repo rate cut, but trimmed SLR

Ahead of Budget 2015, Raghuram Rajan’s RBI snubbed key repo rate cut, but trimmed SLR

With the Budget 2016 a month away, the Reserve Bank of India (RBI), in its monetary policy review on Tuesday 3rd February, 2015, left the key repo rate unchanged at 7.75%.

By: | New Delhi | Published: February 2, 2016 3:34 PM
(Express Photo by Ganesh Shirsekar)

Raghuram Rajan said he expected banks to cut base rates as competition intensified. (Express Photo by Ganesh Shirsekar)

With the Budget 2016 a month away, the Reserve Bank of India (RBI), in its monetary policy review on Tuesday 3rd February, 2015, left the key repo rate unchanged at 7.75%. The central bank had already pruned the policy rate by 25 basis points on January 15, 2015 signalling a turn in the interest rate cycle. RBI did trim the statutory liquidity ratio (SLR) by 50 basis points to 21.5%, the RBI reiterated its stance that the key to further easing would be data that confirmed inflation was easing and some high-quality fiscal consolidation.

While retaining the inflation outlook at 6% for January 2016, RBI said the central bank would be comfortable with a real rate of around 1.50%-2.0%. “What we would like is for the real risk-free policy rate to be 1.5-2.0%,” Raghuram Rajan said.

Raghuram Rajan said he expected banks to cut base rates as competition intensified. However, their stance was evident from Arundhati Bhattacharya, chairman, State Bank of India (SBI), said, in the absence of a pick-up for credit demand, a cut in interest rates could take time.

RBI monetary policy review: Highlights

* Repo rate under LAF unchanged at 7.75%
* SLR of SCBs reduced by 50 bps from 22% to 21.5% of their NDTL from February 7
* ECR facility replaced with system-level liquidity from February 7
* Forex remittance limit enhanced to $250,000 per person from $125,000
* Reinvestment of coupons in gilts by FPIs even when $30-billion cap utilised
* Future FPI investment in debt market only in paper with a minimum residual maturity of 3 years.
* Easier norms for pricing instruments under FDI to encourage investments
* To permit stock exchanges to introduce cash settled Interest Rate Futures contracts on 5-7-Year and 13-15 year G-Secs
* Domestic entities and FPIs will be allowed to take foreign currency positions in the USD-INR pair up to
$15 million per exchange
* New ownership or management of a company will merit an extension in date of commercial operation of an asset with no impact on asset classification
* In talks with Sebi to make it easier for conversion of debt into equity. RBI guidelines expected in 3 months.
* Allows banks to prospectively reverse excess provision in books when NPAs sold to ARCs and cash received exceeds the book value of the asset
* Evaluation for small and payment banks licences

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