RBI Keeps Repo Rates On Hold - Cuts SLR By 50 Bps

The Reserve Bank of India (RBI) in its sixth bi-monthly monetary policy review decided to keep policy rates unchanged at 7.75%, even as it moved to ease liquidity conditions by cutting the proportion of government bonds banks must hold. On 15 January, the RBI cut its signaling repo rate by 25 basis points to 7.75% in response to a fall in inflation. Retail inflation for December fell to 5%, from 6.46% in September and 10.79% in January last year. One basis point is a hundredth of a percentage point.

Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since 15 January, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance.

Continuing with the practice of reducing banks’ mandatory bond holding ratio to infuse more liquidity in the system, the statutory liquidity ratio (SLR) was cut to 21.5% from 22% earlier. The cash reserve ratio (CRR), or the portion of a bank’s money maintained with the central bank, was held steady at 4%.

Bond yields, which have been falling in the past few days factoring in a softer interest rate regime, rose to 7.692% after the policy. The yields on the 10-year bond had fallen to 7.646% on Monday, a level last seen on 15 July 2013, as traders took position expecting a rate cut. Bond yields and prices move in opposite directions. The central bank’s immediate target of containing the consumer price index (CPI) inflation at 8% by January has been achieved. However, the next target is bringing the inflation to 6% by January 2016. It had earlier indicated that both the targets could be achieved after crude oil prices fell to a six-year low and inflation eased quicker than expected.

By and large, inflation dynamics have so far been consistent with the assessment of the balance of risks by the Reserve Bank’s bi-monthly monetary policy statements, although with some undershooting relative to the projected path of disinflation. The outlook for growth has improved modestly on the back of disinflation, real income gains from decline in oil prices, easier financing conditions and some progress on stalled projects, the central bank said, while maintaining a 5.5% gross domestic product (GDP) growth projection for the current year. GDP fell in the September quarter to 5.3%, down from June quarter’s 5.7%. Still, it was higher than March quarter’s 4.6%.

Separately, the RBI said that since the foreign investment limit in government securities is now fully utilised, overseas investors are being allowed to re-invest coupons in government securities into the debt markets even when the existing limits are fully utilised.