RBI Keeps Key Rate Unchanged as Inflation Remains a Concern

RBI Keeps Key Rate Unchanged as Inflation Remains a Concern
File - AP Photo/ Rajanish Kakade
RBI Keeps Key Rate Unchanged as Inflation Remains a Concern

With poor monsoon and food inflation continuing to remain a worry, the Reserve Bank today kept key policy rate unchanged, giving no respite either to borrowers or India Inc.

RBI Governor Raghuram Rajan, however, lowered the Statutory Liquidity Ratio, the portion of deposits that banks are required to keep in government bonds, by 0.5 per cent to unlock about Rs 40,000 crore into the system.

Bankers said the RBI action does not provide room to cut interest rate and hence the EMIs for home and auto loans will remain the same. Industry chambers voiced disappointment saying that RBI should have cut the rate to boost industrial growth.

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 at the 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.

Rajan hinted at more SLR cuts in the future in tandem with the government actions on the fiscal deficit front to help lenders plan for the long-term.

Commenting on RBI action, Oriental Bank of Commerce Chairman and Managing Director S L Bansal said "interest rates are unlikely to come down in the near future. The status quo would continue for some time." 

Rajan said the SLR cut is not aimed at a reduction in the lending rates but is more of a tool to help banks plan better. RBI is concerned about the growth but wants to first take inflation down to have long-term sustainable growth, he said.

"The RBI in no way will hold rates high any longer than necessary. There is a path we are trying to achieve, and we want to achieve that path. We are not against growth, but we do think that growth will be most benefited if we dis-inflate the economy," said Rajan, known as inflation hawk.

"This is an anti-inflation fight, let us win it and that will create the best conditions for sustainable growth," added Rajan, who has raised the key rates thrice since assuming office last September to rein in inflation.

On the intent of the policy action, Rajan said the central bank is trying to enhance the supply side of the economy by providing adequate liquidity, even while arresting any demand side pressures by bringing down the cost of funds by cutting lending rates.

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," Rajan said, adding that supply will increase with the government measures on food management and project completion.

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

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

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