Concerned over impact of weak monsoonon food price, RBI on Tuesday decided to keep the key policy rate unchanged but slashed statutory liquidity ratio (SLR) by 0.5% to unlock about Rs. 40,000 crore into the system.
RBI Governor Raghuram Rajan, who has for the third time in a row kept the rate unchanged, 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 third bi-monthly review of the monetary policy here.
Accordingly, the repo rate will continue to stand at 8%, the reverse repo at 7% and the cash reserve ratio at 4%. The bank rate would remain at 9%.
In order to infuse additional liquidity, Rajan decreased SLR for banks by 0.50% to 22% with effect from the fortnight beginning August 9. A similar move in June had released an additional Rs. 40,000 crore into the system.
Additionally, Rajan also said that RBI will continue to provide liquidity under overnight repos at 0.25% and liquidity under the 7 and 14 day repos of up to 0.75% of net demand and time liabilities.
On retail inflation, which cooled down to 7.31% in June, Rajan said that while achievement of the 8% target for January 2015 is not a worry, there are “upside risks” to its ambitious target of lowering it further to 6% by 2016.
This warrants a “heightened state of policy preparedness,” he said, adding that supply will increase with the government measures on food management and project completion.
Stock markets fell when the policy was announced at 1100 hrs, but showed upward movement thereafter. The BSE’s 30-stock index, Sensex, was trading in the green, up 0.22% from the previous close, at 1138 hrs.
“The RBI will act as necessary to ensure sustained inflation,” said Rajan, who has often surprised with hawkish, anti-inflationary policies.
On growth, he said the central estimate of 5.5% GDP growth for 2014-15 can be sustained and added that prospects for growth have “improved modestly”.
“Sentiment on domestic economic activity appears to be reviving,” Rajan said.
Inflation measured by consumer prices cooled down to a 43-month low of 7.31% for June, while the factory output came in at 4.7% in May, the highest in the last 9 months.
Factors like these had led to expectations of Rajan holding the key rates at the policy review.
—PTI