RBI holds rates

Reserve Bank of India governor Raghuram Rajan added nearly Rs.40,000 crore to the banking sector's lendable resources by reducing the statutory liquidity ratio (SLR) by 50 basis points to 22% even as it kept other key policy rates unchanged. SLR is the percentage of deposits banks must maintain in government securities.
Although the higher liquidity may not bring lending rates down immediately , Rajan said that the cut would ensure that banks have enough money to lend when credit demand picks up. He said that the money would also help keep prices under check by ensuring that core projects get funded.
“What we are trying to do is create an environment where we enhance the supply side without giving too much encouragement to the demand side. So we need projects to be completed, we need infrastructure to pick up because they are holding back the supply side of the economy. We are trying to do this without providing too much of a fillip to demand as this gives rise to inflationary pressure. Given that interest rate tool is a very blunt tool, we are trying to use some of the other tools. At the same time, we have to recognize that the economy is changing and we have to give our financial institutions time to adjust to the new economy,” said Rajan.
In his third bi-monthly monetary policy statement for FY15, Rajan kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8%. RBI also retained the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of bank deposits. The central bank also kept unchanged the terms of overnight repos at 0.25% of bank deposits and 0.75% of bank deposits for 14-day repos.
Although the reduction in SLR requirement is a reformist measure as it brings down this pre-emption of funds by RBI to its lowest level since independence, bankers remain wary. Their concern stems from RBI’s that it is now pursuing a medium-term target of 6% inflation for the next year, which may hopes of a rate cut any time soon.