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RBI lends money to commercial banks at the repo rate through the liquidity adjustment facility window. The cash reserve ratio, the proportion of deposits banks have to keep with RBI, was also left unchanged at four per cent.
Mindful of the need for funds when investment picks up, the central bank reduced the statutory liquidity ratio (SLR), the part of deposits banks have to invest in the government paper, by half a percentage point to 22.5 per cent and promised a further reduction with fiscal consolidation. The cut will free up about Rs 35,000 crore with banks which they can now lend.
Finance Minister Arun Jaitley complimented RBI for striking a balance between growth and inflation, a stance in sync with that of North Block. He promised to address the inflationary concerns, particularly on food prices, through supply-side measures and fiscal consolidation. He also assured the government would strive to revive the investment cycle for higher growth and employment generation.
“RBI has chosen to maintain a balance between growth and inflation while keeping the policy rates unchanged,” Jaitley said on his Facebook page. He reiterated this was also an aim of the government. “It is (also) a priority for the government to maintain a balance between growth and inflation.”
ICICI Bank Managing Director & Chief Executive Officer Chanda Kochhar said: “The reduction in SLR is a welcome signal of the commitment to reduce pre-emption of resources over time and create more room for banks to finance growth.”
The central bank, however, lowered the liquidity provided under the export credit refinance (ECR) facility from 50 per cent of eligible export credit outstanding to 32 per cent.
“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 said.
Economists interpreted this statement as a gradual shift in the central bank’s stance from strict inflation control to pushing growth since RBI Governor Raghuram Rajan took charge last September. “The tilt is towards growth, which is also evident from the reduction in SLR. The cut in SLR indicates preparing the ground for recovery,” said Abheek Barua, chief economist, HDFC Bank.
While bond markets, awaiting the Union Budget early next month, stayed range-bound on Tuesday, equity markets cheered the change in the central bank’s stance. The BSE Sensex gained 173.74 points, or 0.70 per cent from previous close, to close at 24,858.59, surpassing its previous record closing high of 24,716.88 on May 26. The National Stock Exchange’s Nifty closed at 7,415.85, up 53.35 points, or 0.72 per cent. Rate-sensitive stocks, however, ended mixed. The BSE Realty index gained three per cent, while the BSE Bankex closed marginally lower.
“We think the tone of the commentary was one of caution, but more dovish than previous policy meetings,” Barclays said in a note to its clients.
Experts said RBI would now wait for action from the government, particularly on fiscal consolidation and removing supply-side bottlenecks. The central bank said NDA’s victory last month could help “create a conducive environment for comprehensive policy actions and a revival in aggregate demand, as well as a gradual recovery of growth.”
“It is only in the next few weeks that details on the BJP governemnt’s budget will become available. If RBI is right, it would continue with the envisaged consolidation path. But much depends on whether the new government bites the bullet so early in its term and limits spending and subsidies,” HSBC said.
India Inc, though slightly disappointed with the absence of a rate cut, now pins its hopes on the Budget to revive growth. “RBI has maintained the status quo on key policy rates. The Federation of Indian Chambers of Commerce and Industry (Ficci) feels an accommodative stance would have given better encouragement to investments amid early positive sentiments after the new government took charge. After this policy, our hopes are hinged on the forthcoming Union Budget for reviving growth,” said Ficci President Sidharth Birla.
