Rajan frees up more funds for lending, ball now in govt court

  • HT Correpondent, Hindustan Times, New Delhi
  • Updated: Jun 04, 2014 00:49 IST

Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday maintained a status quo on the repo rate — its key lending rate — but slashed the statutory liquidity ratio (SLR) — the proportion of deposits banks are required to park in government securities.

Experts said that in slashing SLR by 0.50 percentage points to 22.5%, the lowest level since 1964, the central bank is also sending a signal to the government to not pause fiscal rectitude, even as it opened up more funds for the banks to lend to the industry.

Read: Rajan takes small growth step, pins hope on Modi govt

“Our overall take is that the RBI is now more willing to support growth provided the government delivers on food supply management and fiscal consolidation,” said Sanjay Mathur, head of economics research, Asia Pacific (ex-Japan), Royal Bank of Scotland.

“The forthcoming Union Budget will be a litmus test on this count. Swift action by the government to tame food inflation and commitment to fiscal discipline will provide the RBI the elbow room for a pro-growth monetary stance,” credit rating and research firm Crisil said in a research report.


The RBI expects credit need to increase, therefore, has injected more funds for banks to lend more than their existing ability.

Experts, however, said it remains to be seen to what extent the SLR cut will enhance bank lending to companies given that lenders are currently parking funds with government bonds more than what is statutorily required.

“The SLR of banks at 28.5% is currently met well above the stipulated rate of 23%. Hence, the reduction to 22.5% is not expected to make a significant difference in bank lending,” said Madan Sabnavis, chief economist at credit rating and research firm Care Ratings.

Read: Rajan concerned about India's growth slowdown: Expert

Experts also said that there is a definite change in the RBI’s phraseology indicating a stronger pro-growth stance, as opposed to a dogged focus on price control.

“The policy could be seen as being a bit on the dovish side than earlier. The key change in wordings of this policy statement is on the guidance on inflation, now seen as more balanced in terms of risks,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

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