The Reserve Bank of India (RBI) in its sixth bi-monthly policy review Tuesday decided to keep key interest rates unchanged. “We have maintained the status quo (on interest rates). We have taken action on other fronts,” Reserve Bank Governor Raghuram Rajan said at the press conference here to announce the policy review.
Rajan said status quo has been maintained as no fresh data on inflation and industrial production has come in since last month. “We will await for more data and fiscal developments to come in and after that we will make judgement,” Rajan said. On being asked about the lack of a forward guidance in the policy review, Rajan said: “The guidance issued earlier remains. Further action will depend on developments on the fiscal front and on the disinflationary process.”
“Monetary policy is a long-term process. You can’t hold me every 15 days saying when are you cutting rates. We have a budget coming up. Inflation data also is yet to come,” he added. The repo rate, or the interest that banks pay when they borrow money from the RBI to meet their short-term fund requirements, remains unchanged at 7.75 percent. The reverse repo rate, or the interest that the RBI pays to commercial banks when they park their surplus short-term funds with the central bank, has been maintained at 6.75 percent.
The marginal standing facility (MSF) rate and the bank rate are kept at 8.75 per cent. The status quo in these key policy rates mean that the equated monthly instalments (EMIs) on home, auto and other loans would remain unchanged. On Jan 15, the apex bank cut the repo rate by 25 basis point from 8 percent to 7.75 percent.
Meanwhile, the RBI reduced the statutory liquidity ratio (SLR) which is the mandatory amount of cash, gold, bonds or other securities that banks must keep with it. The SLR has been reduced by 50 basis points to 21.5 percent of their net demand and time liabilities (NDTL) effective from the fortnight beginning Feb 7, 2015. The reduced SLR will help inject additional capital in to the financial system. The Cash Reserve Ratio (CRR) is left unchanged at 4 percent.
The central bank’s action is on expected lines as most analysts had predicted a status quo, considering the apex bank had last month cut the repo rate. The Reserve Bank also reduced the eligibility limit for foreign exchange remittances under the liberalised remittance scheme (LRS). “On a review of the external sector outlook and as a further exercise in macro prudential management, it has been decided to enhance the limit under the LRS to $250,000 per person per year.”
In the monetary policy statement Governor Rajan indicated that the upside risks to inflation stem from unlikely fiscal slippage, uncertainty over the distribution of the monsoons during 2015 and the low probability of reversal in crude oil prices. Rajan said the growth outlook had improved modestly on the back of disinflation, real income gains from decline in oil prices, easier financing conditions and some progress on stalled projects.
“These conditions should augur well for a reinvigoration of private consumption demand, but the overall impact on growth could be partly offset by the weaker global growth outlook and short-run fiscal drag,” Rajan said in the policy statement. The RBI retained its growth forecast using the old GDP base at 5.5 percent for 2014-15. (IANS)