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RBI keeps policy rate unchanged as inflation remains a concern

PTI 05 Aug 2014, 23:30:27 PM IST
Mumbai: Giving no respite to borrowers, Reserve Bank for the third time in a row kept the key policy rate unchanged saying that it has to remain vigilant to the impact of deficient monsoon on the price situation.  RBI Governor Raghuram Rajan, however, lowered the Statutory Liquidity Ratio, the portion of deposits that banks are required to keep in government bonds, by 0.5 per cent to unlock about Rs 40,000 crore into the system.  Finance Ministry on its part suggested that going forward the RBI should examine the liquidity situation, inflation and growth while fixing the policy rate.

“The Governor, RBI has already stated that RBI will not hold interest rates high any longer than is necessary and if disinflation proceeds as warranted, there will eventually be room to cut rates,” the statement said.  Later, Finance Minister Arun Jaitley in his Facebook update said: “In its credit policy announcement today the RBI kept the policy rate unchanged, as expected by markets. It has, however, reduced the SLR by 50 basis points giving banks greater leeway to lend. As the economy picks up and demand grows this will allow an increase in bank credit.” “Recent data on inflation shows that inflation is moderating. On its part, the government remains committed to the path of fiscal consolidation and reviving the investment cycle that will help bring down inflation and pick up growth,” he added.

Bankers said the RBI status quo does not provide room to cut interest rate and hence the EMIs for home and auto loans will remain the same. Industry chambers voiced disappointment saying RBI should have cut the rate to boost growth.  Rajan said there are upside risks to inflation in view of uncertain monsoon and its impact on food production as also volatile international oil prices.

“It is...appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged,” he said at the third bi-monthly review of the monetary policy here.

Accordingly, the repo rate will continue to stand at 8 per cent, the reverse repo at 7 per cent and the cash reserve ratio at 4 per cent. The bank rate would remain at 9 per cent.  In order to infuse additional liquidity, Rajan decreased SLR for banks by 0.50 per cent to 22 per cent with effect from the fortnight beginning August 9. A similar move in June had released an additional Rs 40,000 crore into the system.  Markets appeared to have reacted positively to the RBI policy. Benchmark Sensex rose by 185 points as investors cheered RBI's move to give more funds to banks for lending.  The rupee also ended nine paise higher at 60.84 against the US dollar.