Ind-Ra: Policy rates are unlikely to be changed in the near term

Policy rates are unlikely to be changed in the near term, says India Ratings & Research (Ind-Ra). As expected, the Reserve Bank of India's (RBI) has maintained a status quo on policy repo rate under the liquidity adjustment facility in its third bi-monthly monetary policy statement 2014-15. However, RBI has lowered the statuary liquidity ratio (SLR) to 22.0% of the net demand and time liabilities from 22.5%.

The new government has retained the fiscal deficit target for FY15 at 4.1% of GDP and announced measures to contain food inflation. However, RBI believes upside risks to keeping Consumer Price Index-based inflation at or below 8.0% by January 2015 are still high. This could emanate from a pass through of administered price increases, less-than-normal monsoon rains and its impact on food production, possibly higher oil prices due to geopolitical concerns and adverse exchange rate movements and strengthening of growth under the continuing supply constraints.

 

Ind-Ra believes the reduction in SLR is a step in the right direction in view of the union government's renewed commitment to the medium-term fiscal consolidation. It will not have a significant impact on the ground as of now because banks' SLR is much above the regulatory limit. However, the reduction in SLR will create more headroom for banks to extend credit to the productive sectors of the economy as and when it picks up.

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