Leaving the policy rates unchanged, RBI said it would allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy

The Reserve Bank of India (RBI), in its second bi-monthly credit policy review has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged, while reducing the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points to 22.5% of their net demand and time liabilities (NDTL). The central bank also increased the eligibility limit for foreign exchange remittances to $125,000 and decided to allow non-residents to take out Indian currency notes of up to Rs25,000 while leaving the country.

"Lead indicators point to continuing sluggishness in domestic economic activity in the first quarter of 2014-15. The ongoing contraction in the production of consumer durables and capital goods, coupled with moderation in corporate sales and non-oil non-gold imports, is indicative of continuing weakness in both consumption and investment demand. The decisive election result, together with improved sentiment should, however, create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth during the course of the year," Dr Raghuram Rajan, the governor of RBI said in a release.

RBI has decided to allow foreign portfolio investors to participate in the domestic exchange traded currency derivatives market to the extent of their underlying exposures plus an additional $10 million, in order to improve the depth and liquidity in the domestic foreign exchange market. The central bank also decided to allow domestic entities similar access to the exchange traded currency derivatives market for which it would soon issue detailed operating guidelines.

The central bank also decided to enhance the eligibility limit for foreign exchange remittances under the Liberalised Remittance Scheme (LRS) to $125,000 from $75,000 without end use restrictions, except for prohibited foreign exchange transactions such as margin trading, lottery and the like.

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 remain at 7%, 4.00% and 9%, respectively.

Repo Rate........................8%

Reverse Repo Rate...........7%

CRR................................4%

Bank Rate.......................9%

RBI also reduced the the liquidity provided under the export credit refinance (ECR) facility to 32% from 50% of eligible export credit outstanding with immediate effect. In addition, the central bank has introduced a special term repo facility of 0.25% of NDTL to compensate fully for the reduction in access to liquidity under the ECR with immediate effect.

For the year 2013-14 as a whole, RBI said, India’s current account deficit (CAD) narrowed sharply to 1.7% of GDP, primarily on account of a decline in gold imports, although other non-oil imports also contracted with the weakening of domestic demand, and there was some pick-up in exports. In April 2014, the trade deficit narrowed sharply due to resumption of export growth after two consecutive months of decline, and the ongoing shrinking of import demand. Robust inflows of portfolio investment, supported by foreign direct investment and external commercial borrowings, kept external financing conditions comfortable and helped add to reserves.

As a result of the unwinding of year-end window dressing, the corresponding decline in the size of excess CRR holding of banks as well as the sharp decline in government cash balances with the Reserve Bank as a result of Government expenditure, liquidity conditions improved significantly in April and May 2014. The average daily access to liquidity from the LAF and term repos during this period has been close to 1.0% of NDTL. "The Reserve Bank will continue to monitor liquidity conditions and will actively manage liquidity to ensure adequate flow of credit to the productive sectors," RBI said.

In March and April, CPI headline inflation has risen on the back of a sharp increase in food prices. Some of this price pressure will continue into May, but it is largely seasonal. Moreover, CPI inflation excluding food and fuel has been edging down. The risks to the central forecast of 8% CPI inflation by January 2015 remain broadly balanced. Upside risks in the form of a sub-normal/delayed monsoon on account of possible El Nino effects, geo-political tensions and their impact on fuel prices, and uncertainties surrounding the setting of administered prices appear at this stage to be balanced by the possibility of stronger Government action on food supply and better fiscal consolidation as well as the pass through of recent exchange rate appreciation. "Accordingly," RBI said, "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."

RBI has also decided to allow residents and non-residents, except citizens of Pakistan and Bangladesh to take out Indian currency notes up to Rs25,000 while leaving the country. At present, only Indian residents are allowed to take Indian currency notes up to Rs10,000 out of the country. Non-residents visiting India are not permitted to take out any Indian currency notes while leaving the country.