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While keeping key rates unchanged, the RBI said in consonance with the calibrated reduction in the SLR, it is necessary to enhance liquidity in the money and debt markets so that financial intermediation expands apace with a growing economy
The Reserve Bank of India (RBI), in its third bi-monthly credit policy review on Tuesday has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged. The central bank, however, has reduced statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points to 22% of their net demand and time liabilities (NDTL), applicable from 9 August 2014.
In its second bi-monthly monetary policy statement of June 2014, the RBI had reduced SLR to 22.5% in anticipation of recovery in economic activity. "With the Union Budget for 2014-15 renewing commitment to the medium-term fiscal consolidation roadmap and budgeting 4.1% of GDP as the fiscal deficit for the year, space has opened up further for banks to expand credit to the productive sectors in response to its financing needs as growth picks up. Accordingly, the SLR is reduced by a further 0.5% of NDTL," RBI governor Dr Raghuram Rajan said in a statement.
RBI said, sentiment on domestic economic activity appears to be reviving, with incoming data suggesting a firming up of industrial growth and exports. It said, “Leading indicators of the services sector are mixed, although there are early signs of modest strengthening of corporate sales and business flows. While the initial slow progress of the monsoon and its uneven spatial distribution raised serious concerns regarding agricultural production, these have been mitigated, though not entirely dispelled, by the pick-up in the monsoon through much of the country in July. The implementation of government policy actions that have been announced should create a congenial setting for a steady improvement in domestic demand and supply conditions.”
Retail inflation measured by the consumer price index (CPI) has eased for the second consecutive month in June, with a broad-based moderation accompanied by deceleration in momentum. Higher prices of vegetables, fruits and protein-based food items were offset by the muted increase in the prices of non-food items, particularly those of household requisites and transport and communication. CPI inflation excluding food and fuel decelerated further, extending the decline that began in September 2013. However, with some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted, the central bank added.
"While inflation at around 8% in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term. The balance of risks around the medium-term inflation path, and especially the target of 6% by January 2016, are still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialise. In the months ahead, government actions on food management and to facilitate project completion should improve supply, but as consumer and business confidence pick up, aggregate demand will also strengthen. The Reserve Bank will act as necessary to ensure sustained disinflation," he added.
At present, banks are permitted to exceed the limit of 25% of total investments under the held to maturity (HTM) category provided the excess comprises only SLR securities, and banks’ total holdings of SLR securities in the HTM category is not more than 24.5% of their NDTL as on the last Friday of the second preceding fortnight. In order to enable banks greater participation in financial markets, this ceiling is being brought down to 24% of NDTL with effect from the fortnight beginning 9 August 2014, the central bank said.
With no change in key policy rates, the repo rate (the rate at which the RBI lends money to banks) remains at 8%. Similarly reverse repo rate (the rate at which the RBI borrows from banks), CRR, and bank rate remains at 7%, 4.00% and 9%, respectively.
Reverse Repo Rate...........7%