Rajan concerned about India's growth slowdown: Expert

  • Reuters, Mumbai
  • Updated: Jun 03, 2014 12:33 IST

"Reserve Bank of India governor Raghuram Rajan is concerned about India's growth slowdown. He is fine with the current inflation trajectory. Cutting statutory liquidity ratio (SLR) shows he is worried about credit offtake, which is not picking up," said Kunal Shah, fund manager in Kotak Mahindra Old Mutual Life Insurance, about the central bank's decision on keeping keeping repo rate unchanged.

The only negative, he said, is that the SLR cut has come amid rising government bond yield. "This shows we are somewhere at the end of the tightening cycle," said Shah.

If the government, along with the RBI, reduces supply pressure by handling subsidies, and taking short-term measures by releasing food grains in godowns, then the RBI will be happy, said Shah. "The governor on his part would now look at easing liquidity crunch by keeping on reducing SLR to 20% in the long term."

Bond yields may stabilise around 8.50% if there is a good monsoon, said Shah.

Market Reaction
The benchmark 10-year bond yield briefly rose to 8.70% from 8.65% before the policy, after the RBI announced a 50 bps cut in banks' statutory liquidity ratio from June 14 fortnight.

However, the yield retreated to pre-policy levels to be down 1 bp on day on the back of a dovish tone in the policy.

The partially convertible rupee trimmed losses to 59.16 per dollar after the RBI kept rates unchanged and took steps to increase availability of credit.

The benchmark BSE share index extended gains after the central bank left policy rates unchanged.

Background
- India's annual consumer price inflation in April accelerated to a three-month high of 8.59%, mainly driven by higher food prices.

- India's industrial production shrank for a second straight month in March, falling 0.5% from a year earlier, dragged down by weak consumer demand and capital investments.

- RBI governor Raghuram Rajan last week said that both the government and the central bank have expressed the need to bring down inflation, while respecting the fact that economic growth is "very weak".

- Asia's third-largest economy grew 4.7% in 2013-14, slower than an official estimate of 4.9% and higher than 4.5% growth a year earlier. It marks the second straight year of sub-5% growth - the worst slowdown in more than a quarter of a century.

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