This Article is From Jun 03, 2014

Rajan Holds Rates in First Policy After Modi Win

Rajan Holds Rates in First Policy After Modi Win

Reserve Bank of India Governor Raghuram Rajan kept the key policy repo rate unchanged at 8 per cent on Tuesday, as widely expected, with consumer price inflation coming down this year after a series of tightening steps by the central bank. This was his first monetary policy announcement after a change of guard at the centre.

The central bank also took steps to increase the availability of credit, reducing the mandatory amount of bonds lenders must park at the RBI - called the statutory liquidity ratio - by 50 basis points to 22.5 per cent of deposits, starting in mid-June. (Read: Bond Yields Rise On SLR Cut)

Siddhartha Roy, Economic Advisor at Tata Group, said the SLR cut is good for banks, but it may force the government to borrow more from markets. Currently, the government is borrowing 28 per cent of its total revenue spend, which will go up further because of this move. The biggest non-productive item is interest expenditure, which is being pushed because of the  move, he added.

Dr. Soumya Kanti Ghosh, economist with SBI said the reduction in SLR is a smart move by the RBI. (Read: Sensex Choppy as RBI Holds Repo Rate; SLR Cut Boosts Banks)

"The government is the largest borrower and it is currently borrowing at negative interest rate. The cut in SLR will force the government to borrow at market determined rate. This will lead to fiscal consolidation," he added.

Economists in a Reuters poll had overwhelmingly expected the RBI would keep India's policy repo rate-the rate at which the central bank lends to banks- on hold after last tightening by a quarter percentage point in January.

Since Dr Rajan took the helm of the central bank in September, he has raised the repo rate by 75 basis points or 0.75 per cent in a bid to tame high consumer inflation.

In the policy statement, the Reserve Bank reiterated its commitment to bringing down retail inflation to 8 per cent by January 2015 and 6 per cent by January 2016.

The central bank maintained GDP growth target at 5-6 per cent for the current fiscal year. India's economy has been growing at sub-5 per cent for two straight years and many analysts have blamed high interest rates for the sharp slowdown in the economy.

High interest rates make credit more expensive and create a difficult environment to re-ignite growth.

The Narendra Modi-led government won an overwhelming mandate on a pro-growth plank. A rate cut would have been a shot in the arm for the Modi government.

(With inputs from Reuters)