Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday kept its key lending rate unchanged, but eased norms that will give banks more funds to lend, a move aimed to boost investment and create jobs.
Importantly, in a clear change in the tenor of its commentary from the earlier steadfast focus on inflation control to a pro-growth approach to aid a turnaround in the economy, Rajan said a stable central government should improve the investment activity and pave the way for wide-ranging policy initiatives.
“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,” Rajan said in the first monetary policy review after the Narendra Modi-led government assumed office last month.
Finance minister Arun Jaitely said that the RBI has chosen to maintain a balance between growth and inflation.
Rajan retained the repo rate—the rate at which banks borrow from RBI —at 8%, but slashed the statutory liquidity ratio (SLR)—the proportion of deposits banks are required to park in government bonds— by 0.50 percentage points to 22.5%, unlocking a potential Rs. 40,000 crore for banks to lend to industry.
The central bank also partially lifted curbs imposed last year-- after rupee touched record lows—allowing Indian individuals to carry up to $125,000 a year from the existing $75,000 a year.
To help travellers, it allowed all residents and non-residents, except citizens of Pakistan and Bangladesh, to take out Indian currency notes up to Rs. 25,000 while leaving the country.
Prior to this, only Indian residents were allowed to take Indian currency notes up to Rs. 10,000 out of the country. Non-residents visiting here were not permitted to take out any Indian currency notes while leaving the country.
“The government is also concerned with restarting the investment cycle and moving towards higher growth and employment generation. We would like to address the problem of inflation through supply side measures particularly in relation to food inflation. Fiscal consolidation is a priority for the government,” Jaitley said in a post on his Facebook page.
“It has followed a calibrated approach aimed in the direction of balancing between growth and inflation,” he said.
Rajan obliquely ruled out further rate hikes in the near future.
“If the economy stays on this course, further policy tightening will not be warranted,” Rajan said in the RBI statement, referring to the moderating inflation trend.