Raghuram Rajan keeps interest rates on hold, creates space for Arun Jaitley's Budget

Written by ENS Economic Bureau | Mumbai | Updated: Jun 4 2014, 14:04pm hrs
Raghuram RajanRBI Governor Raghuram Rajan indicates the central bank would ease monetary policy if inflation slows faster than anticipated.
Meeting the government half way in its mission to boost growth, the Reserve Bank of India on Tuesday left its key policy interest rates on hold and adopted a dovish tone, indicating it would ease monetary policy if inflation slows faster than anticipated.

In his first bi-monthly monetary policy review on Tuesday after the new government took charge at the Centre, RBI Governor Raghuram Rajan kept the repo rate, the benchmark rate at which RBI lends funds to banks, at 8 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," he said, adding that further policy tightening will not be warranted, if the economy stays on this course.

Backing the RBI policy move, finance minister Arun Jaitley said, "It is a priority for the government to maintain a balance between growth and inflation ... It (RBI) has followed a calibrated approach aimed in the direction of balancing between growth and inflation."

Underlining the government's priority to restart the investment cycle, he also promised that the government would address the problem of price increases through supply-side measures, particularly in relation to food inflation.

"The government is also concerned with restarting the investment cycle and moving towards higher growth and employment generation. We would like to address the problem of inflation through supply side measures particularly in relation to food inflation. Fiscal consolidation is a priority for the government," he said.

But, to infuse liquidity in the system, the central bank has reduced the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23 per cent to 22.5 per cent of their deposits.

The cut in SLR, which is the share of deposits that banks must maintain in safe and liquid assets such as government securities, will augment the lendable resources of banks by around Rs 40,000 crore. Bankers said though lending rates are likely to remain steady, the SLR cut will spur the government to improve its finances and aid in boosting private investments.

For instance, if big infrastructure projects get going, the additional money coming into the system by way of SLR cut can take care of the credit requirements.

"This is aimed at freeing up resources for private credit," said Citi in a research note, though it may have limited impact. The policy also marked the RBI's confidence over the strengthening rupee and easing pressures on the current account deficit.

Accordingly, it has hiked the eligible limit under the Liberalised Remittance Scheme (LRS) to $125,000 annually without end-use restrictions except for prohibited foreign exchange transactions such as margin trading and lottery. The eligibility limit for remittances under the LRS was cut to $75,000 from $200,000 last year following the fall of the rupee against the dollar.