RBI Governor Raghuram Rajan says he may not raise rates anymore Reserve Bank of India Governor Raghuram Rajan left interest rates unchanged as expected while signalling a possible easing if conditions were favourable, but surprised investors by lowering the proportion of deposits that banks should hold in the form of government bonds, taking yet another step in longterm reform of the banking sector. Currency market rules, tightened after the rupees steep plunge last year, are being eased. Both overseas investors and locals have been permitted to trade in domestic exchange rate derivatives, and the limit of individual overseas remittances has been raised. Rajan declared that hes done with raising interest rates since any price spike in farm products would now be seasonal, and is ready to lower them if there are signs of the accelerated easing of price pressures. This will come as welcome news for Finance Minister Arun Jaitley as the Narendra Modi government has made reviving the economy one of its primary aims. RBI Governor Raghuram Rajan says he may not raise rates anymoreCut in SLR rate an assurance to market: Bank of BarodaBSE 2.11 % CMD If the economy stays on this course, further policy tightening will not be warranted, Rajan said in his bi-monthly monetary policy review on Tuesday. 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. The governor left the repo rate, at which the central bank lends to banks, at 8%. Other active interest rates such as the reverse repo and the marginal standing facility rates were also unchanged. But the statutory liquidity ratio (SLR), the proportion of deposits that should be held in government bonds, was cut to 22.5%, from 23%. Finance minister Jaitley said RBI had followed a calibrated approach. The RBI has also chosen to maintain a balance between growth and inflation while keeping the policy rates unchanged. It has allowed banks to lend more to the private sector since they will be required to subscribe less to government securities than earlier. It has followed a calibrated approach aimed in the direction of balancing between growth and inflation, Jaitley said in a Facebook post. The government is also striving for a balanced strategy, he said. It is a priority for the government to maintain a balance between growth and inflation. The government is also concerned with restarting the investment cycle and moving towards higher growth and employment generation. We would like to address the problem of inflation through supply side measures particularly in relation to food inflation. Fiscal consolidation is a priority for the government, Jaitley said. Actions taken in the policy review are unlikely to lead to any immediate relief for individuals with home loans or companies with project loans, but they prepare the ground for funding an economic recovery that many say is round the corner. Economic growth projection at 5-6% for the fiscal year has been retained, with the possibility of achieving 5.5%, suggesting a revival is imminent after two years of below-5% growth. The cut in the SLR rate is an assurance to the market that growth would not suffer on account of lack of liquidity, said SS Mundra, chairman and managing director of Bank of Baroda. As of now, we do not expect any change in the deposit and the lending rates. For interest rates to come down, supply side position has to improve and liquidity should ease. VR Iyer, Bank of India chairman and managing director, said, The measures by the RBI are liquidity neutral. We expect interest rates to remain stable at current levels for the next two-three bi-monthly reviews. A cut in SLR sends a positive signal and will be handy once the demand for credit picks up. Governor Rajan has raised interest rates thrice since taking charge in September last year to fight inflation amid criticism that food prices could not be contained through such action. But he persisted as he believed that real interest rates, adjusted for inflation, have to be positive for the economy to get back to the path of sustainable growth.
Posted on: Wed, 04 Jun 2014 14:30:00 +0000
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