Raghuram Rajan's RBI keeps repo rate unchanged, cuts SLR, stays tough on inflation

Written by Agencies | Updated: Aug 6 2014, 19:15pm hrs
Raghuram rajanRaghuram Rajan takes a question from a journalist during a press conference in Mumbai. (Photo: AP)
Guv Raghuram Rajan's RBI (Reserve Bank of India) kept its key policy repo rate unchanged on Tuesday as widely expected, and voiced a commitment to bringing down inflation that convinced many analysts that markets will have to wait until next year for the next cut in rates.

The Reserve Bank of India (RBI) left the repo rate at 8.00 percent, as expected by nearly all 43 economists surveyed by Reuters for a poll published last week. The repo rate has been unchanged since January, when the RBI increased it by a quarter percentage point. Raghuram Rajan RBI policy review: Read Full Speech

"The upside risks to the target of ensuring CPI inflation at or below 8 percent by January 2015 remain, although overall risks are more balanced than in June," Governor Raghuram Rajan wrote in the RBI statement on its policy review.

"It is, therefore, appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged."

Rajan stressed that the next goal was to bring inflation down to 6 percent by January 2016, while warning of upside risks to that target also.

Analysts said the RBI statement could put to rest any prospect of rate cuts for a while, with many ruling out the chances of any reduction this year.

"I think we will be in a pause mode for an extended period of time," said Mohan Shenoi, treasurer at Kotak Mahindra Bank.

The RBI did, however, announce steps to free up resources for banks to lend, a priority for Prime Minister Narendra Modi's government as it seeks to encourage investment in order to put momentum back in sluggish economic growth.

The central bank said it would continue to focus on spurring more lending and lowered banks' minimum bond holding requirements, known as the statutory liquidity ratio (SLR), by half a percentage point to 22.0 percent of deposits to free up more money for lending, effective from Aug. 9.

The RBI also cut the ceiling on debt that must be held-to-maturity (HTM) by lenders half a percentage point to 24 percent.

It did not provide an estimate on how much credit growth that could spur.

The measures come after the RBI had also cut the SLR by half a percentage point in June.

India's benchmark 10-year bond fell, sending its yield up 9 bps to 8.82 percent, as cuts in both the SLR and HTM are likely to pressure bond prices due to new supply.

The partially convertible rupee strengthened to 60.73/74 per dollar versus Monday's close of 60.93/94, partly due to the RBI's caution over the prospects for rate cuts.

Rajan again reiterated a commitment to developing money markets after introducing term repos, or cash for loan transactions in 7- and 14-day increments, this year.


The RBI retained its economic growth forecast of 5.5 percent for 2014/15, depending on whether monsoons or geo-political tensions intensify.

The crucial goal for India is the creation of enough jobs to absorb its rapidly increasing workforce, and growth of below 5 percent in each the last two years was far below what was needed. Industrialists have been calling for lower interest rates, but for sustainable growth, inflation has to be conquered first, and the RBI said there were upside risks.

In June, the retail inflation rate was the lowest since the government started publishing the data series in January 2012, with the consumer price index (CPI) showing a 7.31 percent rise from a year earlier.

Following a weak start to the monsoon rains, food price inflation remains one of the biggest challenges for India, despite government measures to curb hoarding of food articles and setting limits on the export of onions and potatoes, two staples in Indian cooking.

Rajan said the pressure was on to meet both inflation targets for 2015 and 2016.

"We are getting close to the end of the year when our first target has to be met," Rajan told a news conference after the review. "We need to also be confident in reaching the 6 percent (target)."

Lakshmi Iyer Chief Investment Officer (Debt) & Head Products Kotak Mutual Fund

The monetary policy, while on expected lines, may have come as a slight disappointment for the market on account of the tone; which seemed partially hawkish. The central banker is approaching inflation with both the short and long term perspective. Consequently, the rate action may be calibrated gradually, based on the achievement of those targets. The market would now increasingly react to the monsoon outcome, agriculture production, and food inflation numbers until Oct-Nov phase before fresh factors reset the policy calculus. Reaction to Raghuram Rajan's monetary policy review

Chanda Kochhar, MD & CEO, ICICI Bank

The monetary policy statement is a reflection of RBIs continued commitment towards containing inflation. The policy acknowledges the gradual improvement in economic conditions and the governments commitment to fiscal consolidation. The reduction in the statutory liquidity ratio is a welcome step as it would make more lendable resources available for various sectors of the economy. This is a pragmatic policy considering the current macro-economic environment.

NirakarPradhan, CIO,Future Generali India Life Insurance

Maintaining the stance on disinflationary glide path announced in the earlier policy, the Reserve Bank of India today kept the benchmark Repo Rate unchanged at 8%. The RBI monetary policy targeting a CPI inflation rate of 6% as on January 2016 complements well with the Government pursuing the fiscal deficit target of 3% as on March 2017. These measures would bring down inflation and likely provide Indian savers real rate of return in future. Reduction in statutory liquidity ratio (SLR) by 50 bps to 22% of NDTL will release liquidity approx. Rs.40,000cr to the system. The stable interest rates and improved liquidity conditions will support the ongoing economic recovery process.

Hemal Doshi, Chief Currency Strategist, Geojit Comtrade Ltd

The Reserve Bank of India Governor, Raghuram Rajan has done a balancing act in the prevailing uncertain conditions. He has pumped in little more money in the economy by reducing SLR half a percent and the actual policy is likely to be reviewed on September 30, 2014 when the next meeting of the RBI is scheduled to take stock of the situation. At that point, the bank will be in a much better position to assess the progress of the monsoon and the agricultural crop along with inflationary pressure in the economy. That is why; Governor has targeted inflation at 8% by January 2015 and 6% by January 2016. The Reserve Bank has taken a shelter of political stability as a big strength for the economy in general.

Kunal Shah, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance Limited

RBI has maintained status quo as per our and consensus expectations, RBI highlights that risk to inflation is more balanced than the situation in June, however re-iterated that the risk to target of 6% by 2016 are on upside. Policy appears to be hawkish than June statement but in near term it will align the expectation of early rate cuts to gradual ones. RBI has reduced SLR & HTM by 50bp as a plan to gradually reduce the reserve requirement overtime to help banks fund credit requirement of the economy. We expect current disinflation process to continue and core inflation to moderate further however sharp fall is unlikely in short-term given weak start of monsoon. Bond yields will initially inch up however should continue to trade in the narrow range in future till the time inflation actually drops. In medium term as inflation drops and sustains at lower levels yields will drop along with drop in policy rates.

Upasna Bhardwaj, Economist, ING Vysya Bank, Mumbai

RBI's policy today has been slightly hawkish than the last statement by shifting the inflation target from 8 percent towards the medium term target of 6 percent, thereby further affirming our view of a pause on the repo rate front at least through this year.

Rakesh Sharma, MD & CEO, Lakshmi Vilas Bank

A cut in SLR ratio and the HTM holding ratio under SLR by 50 basis each is seen as an enabler to providing credit to development and growth oriented schemes. RBI is also cautious on inflation trajectory and has moved the goal post to the medium term objective of 6% by 2016. This implies a rate cut may have to wait and be contingent on quicker disinflation.

RBI keeps rate unchanged as inflation remains concern

(PTI) Concerned over impact of weak monsoon on food price, RBI today decided to keep the key policy rate unchanged but slashed statutory liquidity ratio (SLR) by 0.5 per cent to unlock about Rs 40,000 crore into the system.

RBI Governor Raghuram Rajan, who has for the third time in a row kept the rate unchanged, said there are upside risks to inflation in view of uncertain monsoon and its impact on food production as also volatile international oil prices.

"It is...appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged," he said third bi-monthly review of the monetary policy here.

Accordingly, the repo rate will continue to stand at 8 per cent, the reverse repo at 7 per cent and the cash reserve ratio at 4 per cent. The bank rate would remain at 9 per cent.

In order to infuse additional liquidity, Rajan decreased SLR for banks by 0.50 per cent to 22 per cent with effect from the fortnight beginning August 9. A similar move in June had released an additional Rs 40,000 crore into the system.

Additionally, Rajan also said that RBI will continue to provide liquidity under overnight repos at 0.25 per cent and liquidity under the 7 and 14 day repos of up to 0.75 per cent of net demand and time liabilities.

On retail inflation, which cooled down to 7.31 per cent in June, Rajan said that while achievement of the 8 per cent target for January 2015 is not a worry, there are "upside risks" to its ambitious target of lowering it further to 6 per cent by 2016.

This warrants a "heightened state of policy preparedness," he said, adding that supply will increase with the government measures on food management and project completion.

Stock markets fell when the policy was announced at 1100 hrs, but showed upward movement thereafter. The BSE's 30-stock index, Sensex, was trading in the green, up 0.22 per cent from the previous close, at 1138 hrs.

"The RBI will act as necessary to ensure sustained inflation," said Rajan, who has often surprised with hawkish, anti-inflationary policies.

On growth, he said the central estimate of 5.5 per cent GDP growth for 2014-15 can be sustained and added that prospects for growth have "improved modestly".

"Sentiment on domestic economic activity appears to be reviving," Rajan said.

Inflation measured by consumer prices cooled down to a 43-month low of 7.31 per cent for June, while the factory output came in at 4.7 per cent in May, the highest in the last 9 months.

Factors like these had led to expectations of Rajan holding the key rates at the policy review.

The next review of the policy will be on September 30, he said.


* Guv Raghuram Rajan-led RBI today kept key interest rate unchanged.

* RBI reduces SLR by 0.5 per cent to 22 per cent.

* RBI keeps inflation target at 8 per cent by January 2015, 6 per cent by January 2016.

* Inspection of Syndicate Bank underway: RBI Governor Raguram Rajan

* RBI pegs GDP growth rate for current fiscal at 5.5 per cent, within 5-6 per cent range projected in April.

* Govt actions on food management and steps to facilitate project completion should improve supply: RBI

* Monsoon still a worry, poses risk to inflation management: RBI

* RBI to carry forward its banking sector reforms agenda.

* Cuts banks' HTM ceiling by 50 bps to 24.0 pct from Aug. 9