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RBI Holds Policy Rates; Token Steps to Boost Liquidity
Aug 07, 2014

RBI Governor Raghuram Rajan 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.

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. 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.

In the last bi-monthly policy in June also the apexl bank cut SLR by 50 basis points from 23 per cent to 22.5 per cent. Now it further reduced the SLR to 22.5 per cent in anticipation of recovery in economic activity.

Highlights

  • 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 

  • Government 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 


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