Disappointing markets and the industry, RBI Governor Raghuram Rajan today left interest rate unchanged, saying there are no developments to warrant further easing since the unscheduled rate cut about a fortnight ago.
RBI kept the benchmark repurchase rate at 7.75 per cent, but cut the statutory liquidity ratio (SLR) – the amount of funds that lenders must set aside – by 50 basis points to 21.5 per cent of deposits from February 7, a move that will help banks to increase lending.
Rajan also hoped that more banks will pass on the rate cut announced last month to the borrowers. Only a few banks had lowered their rates after the cut.
Announcing the sixth bi-monthly monetary policy review, Rajan said: “Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank of India to await them and maintain the current interest rate stance.”
Stock markets fell sharply soon after the policy was announced, with banking stocks hit the worst.
RBI announced a slew of initiatives to develop markets, including allowing foreign institutional investors to re-invest government bond coupons even when their investment limits are exhausted.
To help exports sector, which of late has been struggling following more headwinds in the global economy, it decided to replace export credit refinance facility with the provision of system level liquidity with effect from February 7.
The Central bank reiterated that it wanted more comfort on inflation front and “high-quality fiscal consolidation” as well as signals from Finance Minister Arun Jaitley’s first full year budget, due at month end.
Rajan said inflation was likely to be around the target level of 6 per cent by January 2016 but flagged monsoon, oil prices and “the unlikely possibility of significant fiscal slippage” as upside risks.
Current account deficit was projected at 1.3 per cent of GDP this fiscal and even lower in the next, primarily on slumping international oil prices.
Rajan, who made inflation-fighting a priority since taking over 17 months ago, had sprung a surprise on January 15 when he cut interest rates by 25 basis points in an unscheduled review.
Later, talking to reporters, Rajan said the central bank will be watching the forthcoming data on inflation and GDP. The first bi-monthly monetary policy for financial year 2015-16 is scheduled on April 7.
He also said that the government has the intent of producing a solid budget. Finance Minister Arun Jaitley will unveil the first full-fledged budget of the new government on February 28.
The monetary policy document said that despite fiscal deficit having touched 99 per cent of the target by November itself, RBI was confident that the government will not miss the budgeted 4.1 per cent target.
On the surprise 25 bps rate cut on January 15, Rajan said the decision was led by falling inflationary expectations and data on weak commodity prices and muted rural wage growth.
“Having committed in public statements to initiate a change in the monetary policy stance as soon as incoming data permitted, the Reserve Bank cut the policy rate on January 15,” he added.
Referring to economic growth, RBI said that though revision in the base year for GDP and calculation methods will mean some revision in GDP growth numbers for 2014-15 as well as in the forecasts, growth expectations should be tempered.
RBI estimates the GDP (under old base year) for current fiscal at 5.5 per cent and 6.5 per cent in 2015-16.
On payments banks and small finance banks as differentiated banks, RBI said it has received 72 applications for small finance banks and 41 applications for payments banks up to the deadline for submission yesterday.
Two External Advisory Committees (EACs) will evaluate the applications received and thereafter make their recommendations to the RBI.
The central bank also increased the eligibility limit for foreign exchange remittances under the Liberalised Remittance Scheme (LRS) to USD 250,000 per person per year from the earlier USD 125,000.
RBI keeps key rate unchanged
(Reuters) The Reserve Bank of India (RBI) on Tuesday held interest rates steady at 7.75 percent after easing monetary policy just three weeks ago, leaving its next move probably until after the government presents its Union Budget at the end of this month.
Instead, the Reserve Bank of India cut the statutory liquidity ratio (SLR) – or the amount of bonds that lenders must set aside – by 50 basis points to 21.5 percent of deposits from Feb. 7, prodding banks to increase lending.
“Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth,” the RBI said in a statement.
The RBI also announced a slew of initiatives to develop markets, including allowing foreign institutional investors to re-invest government bond coupons even when their investment limits are exhausted.
Most economists polled by Reuters had expected the Reserve Bank of India to keep its repo policy rate steady, and reduce rates later so long as the budget, due to be unveiled by Finance Minister Arun Jaitley on Feb. 28, does not disappoint in terms of reducing the fiscal deficit.
The RBI said in its statement that it wanted more comfort that inflation would continue to ease and that it would await action from the government regarding the country’s finances.
“Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest stance,” the central bank said.
Comforted by falling world oil prices and inflation slowing, the RBI had surprised investors with 25 basis points cut in the repo rate on Jan. 15, even though investors were expecting the central bank to embark on an easing cycle at some point during the early months of the year.
The RBI clearly saw little point in waiting any longer to reduce borrowing costs in an economy that was struggling to gather momentum.
Markets are pricing in more interest rate cuts over the rest of the year given inflation is expected to remain subdued on the back of a plunge in global crude prices and bigger-than-expected falls in domestic vegetable and fruit prices.
Consumer prices rose 5 per cent in December, well within the RBI target of 6 per cent by January 2016.
Highlights: RBI’s Monetary and Liquidity Measures
On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:
* RBI keeps the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.75 per cent;
* RBI keeps the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
* RBI reduces the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.0 per cent to 21.5 per cent of their NDTL with effect from the fortnight beginning February 7, 2015;
* RBI replaces the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7, 2015;
* RBI continues to provide liquidity under overnight repos of 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
* RBI continues with daily variable rate term repo and reverse repo auctions to smooth liquidity.
Consequently, the reverse repo rate under the LAF will remain unchanged at 6.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75 per cent.