Friday 28 October 2016

RBI Should Examine Inflation, Growth While Setting Rate: FinMin

New Delhi

With the RBI opting for status quo in its monetary policy review today, the Finance Ministry said going forward the central bank should examine the liquidity situation, inflation and growth while fixing the policy rate.

"Going forward, the RBI should examine the liquidity situation, inflation and growth in setting policy rates," the Finance Ministry said in a statement hours after the RBI Governor Raghuram Rajan announced the third bi-monthly monetary policy review.

Recent data on inflation shows that inflation is moderating.

Wholesale inflation for June declined to 5.43 per cent from 6.01 per cent in the previous month.

"On its part, the Government remains committed to the path of fiscal consolidation and reviving the investment cycle that will help bring down inflation and pick-up growth further," it said.

As expected by markets, the RBI in monetary policy has retained repo rate 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 static at 9 per cent.

It, however, lowered Statutory Liquidity Ratio (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.

The reduction in SLR, a portion of bank deposits banks are required to investment in government securities, give banks greater leeway to lend.

"The Governor, RBI has already stated that RBI will not hold interest rates high any longer than is necessary and if disinflation proceeds as warranted, there will eventually be room to cut rates," the statement said.

As the economy picks-up and demand grows, this will allow an increase in bank credit, it said.

Announcing the credit policy, 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.

RBI has kept repo at 8 per cent since February despite industry demanding a rate cut to boost manufacturing which has remained stagnant in the past two fiscals.

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