Jun 3, 2014, 11.38AM IST TNN [ Mayur Shetty ]
In keeping with expectations, RBI governor Raghuram Rajan left the repo rate, the rate at which the RBI lends to banks, unchanged at 8%.
MUMBAI: In a move that will release over Rs 39,000 crore of funds locked in government bonds, the Reserve Bank of India has cut the mandatory statutory liquidity ratio (SLR) requirement for banks by 50 basis points to 22.5% in its bi-monthly policy on Tuesday.
SLR is the portion of bank deposits that banks have to mandatorily invest in government bonds.
In keeping with expectations, RBI governor Raghuram Rajan left the repo rate, the rate at which the RBI lends to banks, unchanged at 8%. The governor appears to have taken a pragmatic decision by holding his own on rates but at the same time addressing concerns of the finance ministry of adequate credit to businesses by releasing liquidity. The biggest beneficiaries of this move will be private banks and foreign banks who are close to the statutory limit on SLR.
In his first policy statement post election, Rajan said, "the decisive election result, together with improved sentiment should create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth during the course of the year."
He, however, said that the first quarter continued to be sluggish and the outlook for agriculture is clouded by the meteorological department's forecasts of a delay in the onset of the south-west monsoon with a 60% chance of the occurrence of El Nino.
ongoing contraction in the production of consumer durables and capital goods, coupled with moderation in corporate sales and non-oil non-gold imports, is indicative of continuing weakness in both consumption and investment demand," Rajan said.
On inflation, the governor said that while El-nino and geopolitical situation was a threat to food prices, these risks were balanced by the possibility of stronger government action on food supply and better fiscal consolidation as well as the pass through of recent exchange rate appreciation. "Accordingly, at this juncture, it is appropriate to leave the policy rate unchanged, and to allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy," Rajan said in a statement.
In his statement, Rajan said that since the April policy, global economic activity is evolving at different speed.
"A broad-based strengthening of growth is gaining traction in the US and the UK, after a moderation in the first quarter of 2014 due to adverse weather conditions. However, in the euro area, recovery is struggling to gather momentum. The pick-up in sales in Japan in anticipation of the consumption tax hike has been followed by a sharp fall in consumer spending. Growth in coming quarters will depend on all three "arrows" being put in play. Structural constraints continue to impede growth prospects in emerging market economies (EMEs), with concerns about the slowdown in China as its economy rebalances. Financial markets across the world still remain vulnerable to news about the impending normalisation of interest rates in some developed economies, even as some valuations appear frothy."