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Rates on hold, but banks get more funds to lend

business Updated: Aug 05, 2014 23:14 IST
HT Correspondent
HT Correspondent
Hindustan Times

Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday kept the central bank’s key lending rate unchanged amid continuing inflation worries, but eased norms that will give banks more funds to lend in a move aimed to boost investment and create jobs.

A status quo on interest rates would imply your EMIs are unlikely to fall anytime soon even as high prices, despite recent moderation in inflation rates, continue to eat away larger chunks of household incomes.

Ahead of the festival season, high borrowing costs could dent purchases of houses, cars and other consumer goods.

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%, unlocking a potential Rs 40,000 crore for banks to lend to industry.

This is the second cut in SLR in the last two credit policies since June, signalling a subtle change in RBI’s stance from focus on controlling inflation to aiding growth.

Amid revival signs, Rajan said that “the implementation of government policy actions that have been announced should create a congenial setting for a steady improvement in domestic demand and supply conditions.”

The RBI, however, struck a note of caution stating the lower inflation rates in the last two months weren’t strong enough to warrant an interest rate cut.

“It is appropriate to continue maintaining a vigilant monetary policy stance, while leaving policy rates unchanged,” Rajan said on Tuesday.

India’s wholesale inflation rate growing at its slowest pace in five months at 5.43% in June, while retail inflation -- which captures shop-end prices -- grew at 7.31% during the month, its lowest in 30-months, driven down by lower food prices.

Wholesale food inflation rate fell to 8.1% in June from 9.50% in the previous month and retail food inflation grew at a slower 7.90% compared to 9.40% in May, indicating that recent efforts, including export curbs on onions and a crackdown on hoarders, may have contained further spike in prices.

Rajan, however, warned that uncertainty over monsoon conditions, its impact on food prices and possibly higher oil prices stemming from geo-political concerns could fan inflation that “warrants heightened state of policy preparedness if these risks materialise.”

Analysts such as Crisil said that RBI was unlikely to cut rates during the 2014-15.

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