In the last policy review in June, the Reserve Bank of India, or RBI, retained the policy rate. The governor of the RBI today announced its second bi-monthly monetary review for 2014-15.
On the basis of an assessment of the current and evolving macroeconomic situation, the central bank has has decided to:
- Keep the policy repo rate under the liquidity adjustment facility, or LAF, unchanged at 8%
- Keep the cash reserve ratio, or CRR, unchanged at 4% of net demand and time liabilities (NDTL)
- Reduce the statutory liquidity ratio, or SLR, from 22.5% to 22% cent of NDTL with effect from the fortnight starting August 9, 2014
- Continue to provide liquidity under overnight repos at 0.25% cent of bank-wise NDTL and liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL of the banking system
Consequently, the reverse repo rate under the LAF will remain unchanged at 7%, and the marginal standing facility, or MSF rate, and the Bank Rate at 9%.
Currently, banks are permitted to exceed the limit of 25% of total investments under the held to maturity (HTM) category provided the excess comprises only SLR securities, and banks’ total holdings of SLR securities in the HTM category is not more than 24.5% of their NDTL as on the last Friday of the second preceding fortnight. In order to enable banks greater participation in financial markets, this ceiling is being brought down to 24% of NDTL with effect from the fortnight beginning August 9, 2014.
Assessment:
- Sentiment on domestic economic activity appears to be reviving, with incoming data suggesting a firming up of industrial growth and exports.
- Leading indicators of the services sector are mixed, although there are early signs of modest strengthening of corporate sales and business flows.
- While the initial slow progress of the monsoon and its uneven spatial distribution raised serious concerns regarding agricultural production, these have been mitigated, though not entirely dispelled, by the pick-up in the monsoon through much of the country in July.
- Retail inflation measured by the consumer price index, or CPI, has eased for the second consecutive month in June, with a broad-based moderation accompanied by deceleration in momentum.
- However, with some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted.