Rates unchanged; RBI eases banks' liquidity norms marginally

The Reserve Bank of India (RBI) has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent and the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL), extending its efforts to control inflationary pressures that could imperil long-term prospects of economic growth.

RBI said, on the basis of an assessment of the current and evolving macroeconomic situation, it has also decided to reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 23.0 per cent to 22.5 per cent of their NDTL with effect from the fortnight beginning 14 June 2014 and the liquidity provided under the export credit refinance (ECR) facility from 50 per cent of eligible export credit outstanding to 32 per cent with immediate effect.

SLR is the portion of bank deposits that banks have to mandatorily invest in government bonds.

The reduction SLR is expected to release over Rs39,000 crore of funds locked in government bonds, giving room for banks to meet investment and credit demands as the economy picks up pace.

A reduction in the required SLR will give banks more freedom to expand credit to the non-government sector, it added.

The central bank also introduced a special term repo facility of 0.25 per cent of NDTL to compensate fully for the reduction in access to liquidity under the ECR, with immediate effect, and decided to continue to provide liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.

Consequently, RBI said, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

RBI said with 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 per cent of NDTL.

RBI said it would continue to monitor liquidity conditions and actively manage liquidity to ensure adequate flow of credit to the productive sectors.

RBI noted that the consumer price inflation in March and April has risen on the back of a sharp increase in food prices and some of this price pressure could continue into May and beyond depending on the Monsoon.

While the central forecast of 8 per cent CPI inflation by January 2015 remain broadly balanced, the upside risks of a sub-normal/delayed monsoon, geo-political tensions and their impact on fuel prices, and uncertainties surrounding the setting of administered prices could affect inflation outlook unless the government effectively intervenes in the market and the recent exchange rate appreciation stablises, RBI said.

Accordingly, 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.

For the year 2013-14 as a whole, India's current account deficit (CAD) narrowed sharply to 1.7 per cent of GDP, primarily on account of a decline in gold imports, although other non-oil imports also contracted with the weakening of domestic demand, despite a mild rise 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.

The RBI said it remained committed to keeping the economy on a disinflationary course, taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016. If the economy stays on this course, further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance.

RBI retained the April projection of real GDP growth at 4.7 per cent in 2013-14 and in a range of 5 to 6 per cent in 2014-15 with risks evenly balanced around the central estimate of 5.5 per cent.