Mumbai: Continuing to adopt caution, the Reserve Bank on Tuesday kept interest rates unchanged but promised to ease them if there is faster disinflation even as it made clear that the decisive election results could result in comprehensive policy actions.
However, the central bank in its bi-monthly policy review unlocked about Rs 40,000 crore of banking funds by cutting the statutory liquidity ratio (SLR), the portion of deposits banks park in government bonds, by 0.5 percent to 22.5 percent.
This is the second consecutive time that RBI Governor Raghuram Rajan has kept interest rates unchanged, belying hopes of any reduction in EMIs for home and auto loans.
"At this juncture, it is appropriate to leave the policy rate unchanged, and to allow the disinflationary effects of rate increases undertaken during September 2013-January 2014 to mitigate inflationary pressures in the economy," he said.
If the economy stays on this course, he added, "further policy tightening will not be warranted. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance."
While noting the negative factors that continue to dog the economy, such as doubts over a normal monsoon coupled with continuing weakness in both consumption and investment demand, Rajan acknowledged the possibility of a conducive environment after the recent election results.
"The decisive election result, together with improved sentiment should, however, create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth during the course of the year," he said.
Finance Minister Arun Jaitley said the central bank "has followed a calibrated approach aimed in the direction of balancing between growth and inflation."
The repo rate, at which the RBI lends to banks, has been retained at 8 percent.
Observing that the priority of the government is to maintain a balance between growth and inflation, Jaitley said, "The government is also concerned with restarting the investment cycle and moving towards higher growth and employment generation.
"We would like to address the problem of inflation through supply-side measures, particularly in relation to food inflation. Fiscal consolidation is a priority for the government," he said.
Industry chambers hailed the apex bank's move to slash the SLR, saying it will give banks more room for onward lending to the corporate sector.
The cut in SLR, which is now 22.5 percent of net demand and time liabilities (NDTL), would come into operation with effect from the fortnight beginning June 14.
The BSE Sensex surged 173.74 points to end at a fresh closing peak of 24,858.59 points.
On growth, Rajan maintained the RBI's median estimate of GDP expansion coming in at 5.5 percent this financial year.
The cash reserve ratio remains unchanged at 4 percent as does the reverse repo rate at 7 percent. The marginal standing facility rate and bank rate also remain unchanged at 9 percent.
