The Telegraph
Wednesday , August 6 , 2014
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RBI holds rate in inflation fight
Token steps to boost liquidity

“Let’s fight the anti-inflation fight once and let’s win. That will create the best conditions for sustainable growth”
- Raghuram Rajan in Mumbai on Tuesday. (PTI)

Mumbai, Aug. 5: The Reserve Bank of India today brought its January 2016 inflation target of 6 per cent within its policy radar that effectively rules out any rate cut this fiscal.

In tune with his hawkish outlook, RBI governor Raghuram Rajan today kept the repo rate intact at 8 per cent in his bi-monthly monetary policy statement, while offering minor solace to industry in the form of statutory liquidity ratio cuts and reduced ceiling for banks’ held-to-maturity portfolio.

“While inflation at around 8 per cent in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term.

“The balance of risks around the medium-term inflation path, and especially the target of 6 per cent by January 2016, is still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialise,” the RBI document said.

As industry chambers voiced their disapproval at Rajan’s stand, the finance ministry stepped in with a statement that emphasised the need for the RBI to include growth within its objectives.

“Going forward, the RBI should examine the liquidity situation, inflation and growth in setting policy rates,” the ministry said in a statement hours after Rajan revealed his firm stand.

Besides maintaining status quo on the repo rate at 8 per cent, the RBI took a couple of measures towards enhancing the availability of liquidity in the economy. It reduced banks’ statutory liquidity ratio (SLR) by 50 basis points to 22 per cent. The held-to-maturity (HTM) portfolio in banks’ SLR portfolio was also brought down to 24 per cent from 24.5 per cent.

Repo is the overnight rate at which the RBI lends to banks, while SLR is the proportion of deposits that banks have to hold in government securities.

The apex bank had earlier announced that it wanted to bring down retail inflation to 8 per cent by January 2015 and 6 per cent a year later. It today brought this target of 6 per cent under consideration.

Analysts said that a rate cut was unlikely this fiscal as achieving the target of 6 per cent will be a tough task, meaning existing home loan borrowers may have to wait till next year for any reduction in interest rates.

“Recent data suggest that growth is picking up and inflation is stepping down. Nonetheless, the potential risks to inflation in months ahead, once the base effect vanishes, remain high and thus, we stick to our call of no change in the policy rate this fiscal,” a note from Crisil said.

Rajan had a credible explanation for raising the inflation stakes. “We are not against growth, but we do think that growth will be most benefited if we disinflate the economy and we don’t have to fight this fight again. Let’s fight the anti-inflation fight once and let’s win. That will create the best conditions for sustainable growth,” he told newspersons.

The RBI also made a list of the upside risks to inflation such as the pass-through of administered price increases and continuing uncertainty over monsoon conditions and their impact on food production.

Other risks include higher oil prices stemming from geo-political concerns and exchange rate movement and continuing supply constraints.

Rajan offered some hope for those looking forward to an interest rate cut.

“What we are saying is that if disinflation proceeds as warranted, we will eventually have room to cut rates. I want to emphasise that the RBI in no way will hold rates higher any longer than necessary, there is a path that we are trying to achieve and we want to achieve that path.” His comments triggered a late rally on the bourses, with the Sensex ending up with gains of over 184 points.


• Repo rate unchanged at 8%

• CRR unchanged at 4%

• SLR cut 50 basis points to 22%

• GDP growth estimate at 5.5% for current financial year

• Target for consumer price index inflation set at 8% for January 2015; 6% by January 2016

• Banks’ SLR holdings in held-to-maturity category lowered by 50 basis points to 24%

• Higher oil prices, pass-through of administered price increases pose upside risks to inflation

• Monsoons still a concern, posing risks to inflation

• Govt action on food management and fast-tracking project completion to improve supply

• Banking sector reforms will continue

• Next bi-monthly policy statement on September 30