Mumbai: Reserve Bank of India Governor Raghuram Rajan kept the country`s key policy repo rate unchanged at 8 percent on Tuesday, as widely expected, with consumer price inflation coming down this year after a series of tightening steps by the central bank.
The central bank also took steps to increase the availability of credit, reducing the mandatory amount of bonds lenders must park at the RBI - called the statutory liquidity ratio - by 50 basis points to 22.5 percent of deposits, starting in mid-June.
COMMENTARY
KUNAL SHAH, FUND MANAGER – FIXED INCOME INVESTMENTS, KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE, MUMBAI
The governor is concerned about India`s growth slowdown. He is fine with current inflation trajectory. Cutting SLR shows he is worried about credit offtake, which is not picking up. Only negative is SLR cut has come amid rising government bond yield This shows we are somewhere at the end of the tightening cycle.
If government along with RBI reduces supply pressure by handling subsidies, and taking short-term measures by releasing food grains in godowns, then RBI will be happy. The governor on his part would now look at easing liquidity crunch by keeping on reducing SLR to 20 percent in the long term.
Bond yields may stabilise around 8.50 percent if there is a good monsoon.
MARKET REACTION
The benchmark 10-year bond yield briefly rose to 8.70 percent from 8.65 percent before the policy, after 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 percent, mainly driven by higher food prices.
- India`s industrial production shrank for a second straight month in March, falling 0.5 percent from a year earlier, dragged down by weak consumer demand and capital investments.
- Reserve Bank of India 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 percent in 2013/14, slower than an official estimate of 4.9 percent and higher than 4.5 percent growth a year earlier. It marks the second straight year of sub-5 percent growth - the worst slowdown in more than a quarter of a century.
