In line with the Modi Government’s priority for taming inflation, the Reserve Bank on Tuesday took a tough stand and announced a ‘status quo’ monetary policy except for reducing SlR which was revised downwards by 0.5 percentage points to 22.5 per cent.
This is the second consecutive time that RBI Governor Raghuram Rajan has kept interest rates unchanged, belying hopes of any reduction in EMIs for home and auto loans. The repo rate, at which the RBI lends to banks, has been retained at 8 per cent and the cash reserve ratio (CRR) has been kept unchanged at 4 per cent.
The statutory liquidity ratio (SlR), the mandatory amount of bonds lenders must park at the RBI, has been cut by 0.5 basis points to 22.5 per cent of their net demand and time liabilities (NDTl) with effect from June 14. This cut is expected to unlocked about Rs 40,000 crore of banking funds.
However, bankers ruled out lending rate reduction after SlR cut even though the central bank’s SlR cut infuses additional liquidity into the system. Finance Minister Arun Jaitley described the RBI’s status quo policy as a calibrated approach to strike a balance between growth and inflation. Jaitley said the Government on its part will address the problem of price rise by improving supplies.
“It is a priority for the Government to maintain a balance between growth and inflation ... It (RBI) has followed a calibrated approach aimed in the direction of balancing between growth and inflation,” Jaitley said in a statement.
Jaitley said the Government would address the problem of price increases through supply-side measures, particularly in relation to food inflation. The Government, he added, is also concerned with restarting the investment cycle and moving towards higher growth and employment generation. “Fiscal consolidation is a priority for the government,” he said.
Jaitley said that by reducing the SlR, the central bank has allowed banks to lend more to the private sector since they will be required to subscribe less to government securities than earlier.
Rajan, who has increased the repo rate thrice since September, said no more tightening would be warranted if the economy stays on a disinflationary course. He added that the RBI may also consider a cut if the disinflation process is faster than anticipated. “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.
STOCK MARKET & RUPEE
The BSE Sensex surged 173.74 points to end at fresh closing peak of 24,858.59 points. On growth, Rajan maintained the RBI’s median estimate of GDP expansion coming in at 5.5 per cent for this financial year. However, bank stocks came under selling pressure as the Reserve Bank kept interest rates unchanged at the monetary policy review. Shares of ICICI Bank ended 0.28 per cent lower, while SBI was
down 0.03 per cent on the BSE. Bank of India declined 1.91 per cent, Kotak Mahindra Bank lost 1.46 per cent, while IDBI Bank was down 1.27 per cent, PNB (0.69
per cent) and Canara Bank (0.36 per cent).The BSE bankex index settled on a flat note, 0.18 per cent lower at 17,478.99.
Meanwhile, the rupee fell for the fourth straight day, the rupee weakened by 7 paise to Rs 59.22 per dollar in early trade on the Interbank Foreign Exchange market, weighed down by dollar’s gains against other currencies. Forex dealers said, a higher opening in the domestic equity market ahead of RBI policy meeting capped the rupee’s losses. The rupee had lost 4 paise to close at 59.15 against the US dollar in yesterday’s trade due to sustained demand for the US currency from importers, amid firm dollar overseas.
Further, encouraged by an improvement in the forex market, the RBI raised the annual overseas investment ceiling for individuals to USD 125,000 from USD 75,000. The apex bank also permitted all residents and non-residents, except citizens of Pakistan and Bangladesh, to carry up to Rs 25,000 in Indian currency notes while leaving the country.
The current limit for carrying domestic currency notes for Indians travelling overseas is Rs 10,000. To enhance depth in the foreign exchange market, the RBI allowed foreign portfolio investors to participate in the domestic exchange-traded currency derivatives market, a segment where volumes have declined. The central bank also reduced the availability of funds under the export credit refinance window from 50 per cent of export credit outstanding to 32 per cent.
INFlATION
Asserting that retail inflation excluding food and fuel is still at an elevated level, the Reserve Bank of India said it would endeavour to curb price increases. “The Reserve Bank remains committed to keeping the economy on a disinflationary course, taking CPI inflation to 8 per cent by January 2015 and 6 per cent by January 2016,” RBI Governor Raghuram Rajan Said. He said the lowering of interest rates will depend on easing of inflationary pressure.
“If the economy stays on this course, further policy tightening will not be warranted. 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,” Rajan said.
Rajan said the upside risks to the CPI inflation target of 8 per cent by January 2015 lie in the form of a sub-normal or delayed monsoon on account of possible El Nino effects, geo-political tensions and their impact on fuel prices, and uncertainties surrounding the setting of administered prices.
BANKERS
Chanda Kochhar, who heads ICICI Bank, the largest private sector lender, described the policy as very “balanced” and “pragmatic”, coming in the wake of the strong electoral mandate.
“The decision to hold the rates reflects the current level of inflation as well as the expectation of policy and administrative actions from the Government in the coming months to address inflation as well as boost growth,” Kochhar said.
On the 0.5 per cent reduction in the statutory liquidity ratio (SlR), Mundra said it is not very surprising as the RBI had already hinted that in the medium to long term, its intention was to bring it down to help productive sectors.
Indian Overseas Bank Chairman and Managing Director M Narendra said his bank is not considering any rate change even though he gets about Rs 1,600 crore released because of the SlR cut and the decision to reduce the export credit refinance (ECR) limit to 32 per cent from 50 per cent.
REAlTORS DISMAYED
Realtors, however, expressed dismay at the status quo and have sought a cut in interest rate to boost housing demand which is one of the strong engines of growth of the economy. Expressing disappointment over the RBI’s monetary policy, realtors body CREDAI sought cut in interest rates on home loan to boost housing demand.
In a statement, Confederation of Real Estate Developers’ Associations of India (CREDAI) demanded a pro-growth stance on the policy rates” for the development of a housing sector. “We at CREDAI appreciate the positive step taken by RBI to reduce SlR by 50 bps, which will release a liquidity of Rs 39,000 crore for the banks.
“We understand the central bank’s priority to fight inflation. However, at the same time real estate industry also awaits proactive measures to stimulate the home purchase by bringing down the home loan rate,” CREDAI National President C Shekar Reddy said.
Real estate sector is facing a huge slowdown in demand from last few years due to high borrowing cost to home buyers and developers coupled with low economic growth. However, Global property consultant, CBRE South Asia Chairman & MD Anshuman Magazine said the RBI move to keep the repo rate unchanged will be appreciated by the industry. Parsvnath Developers Chairman Pradeep Jain said the policy was on the expected line. “As the Union Government is about to present its first Budget in a month’s time, it gives valid reasons to RBI to be cautious.”
FUTURE GROWTH
Meanwhile, the bank has expressed hopes of a higher growth trajectory for the current fiscal and expects GDP growth between 5 and 6 per cent in the current financial year even as uncertainty over monsoon with the El Nino affect and a negative forecast for agriculture.
“Contingent upon the desired inflation outcome, the April projection of real GDP growth from 4.7 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15 is retained with risks evenly balanced around the central estimate of 5.5 per cent,” the Reserve Bank of India said in its Second Bi-Monthly Monetary Policy Statement for this financial year.
The RBI, however, said lead indicators point to continuing sluggishness in domestic economic activity in the first quarter of 2014-15. The ongoing contraction in 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, it said.
The forecast for agriculture is clouded by the meteorological department’s forecast of a delay in the onset of the south-west monsoon with a 60 per cent chance of the occurrence of El Nino, it said. The decisive election result, together with improved sentiment should, however, 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, the RBI said.