As was widely expected, the Reserve Bank of India on Tuesday kept the repo rate (the interest rate at which it lends short-term funds to banks) unchanged at 7.75 per cent.
Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance, the RBI said in a statement.
The RBI had cut the rate on January 15, outside policy review cycle, from 8 per cent to 7.75 per cent.
In all likelihood, the central bank is awaiting cues on the fiscal consolidation front in the Budget, scheduled to be announced on February 28, before further embarking on rate cuts, say market experts.
To encourage banks to lend more, the central bank reduced the statutory liquidity ratio (SLR) -- the slice of deposits that banks necessarily have to invest in Government securities -- of scheduled commercial banks by 50 basis points from 22.0 per cent to 21.5 per cent of their deposits with effect from the fortnight beginning February 7, 2015.
The RBI said banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth.
Also, to help exports sector, which of late has been struggling following more headwinds in the global economy, the central bank has decided to replace export credit refinance facility with the provision of system level liquidity with effect from February 7.
The RBI Governor said: "We should not attribute stigma to an NPA. It just means it is not paying. Projects that are halted because of NPAs can be re-started by new loans."
Looking ahead, inflation is likely to be around the target level of 6 per cent by January 2016. The baseline projection for growth using the old GDP base has been retained at 5.5 per cent for 2014-15.
The policy document took consolation in the declining trend and noted that even the upturn in December turned out to be muted relative to projections.
Rajan said: “The Reserve Bank will keenly monitor the revision in CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements“.
Despite fiscal deficit touching 99 per cent by November, the Governor said he was confident that the Government will not miss the budgeted 4.1 per cent target.
The RBI Governor said that he was looking for developments including disinflationary trends and on the fiscal front with the Budget. "These are the the indicators we will look for. This includes low oil prices, that feeds into the disinflationary process, we also had stable exchange rate. So we will see how all these moves."
"What we have said is we are waiting for data, we are looking for Budget, inflation numbers, new GDP numbers. These are important pieces of information that we are waiting for which we will take into account."
Rajan said, "It's too early to say that exchange rate has played a role in export numbers. it would be wrong to say we are grossly uncompetitive. We do not intervene to target a particular level, what we do is intervene where there is volatility we have intervened both ways. We are perfectly comfortable where the rupee is but with quantitative easing going on there is a risk that we would become uncompetitive.
The RBI said that it would not like to be seen as being against foreign investors. Therefore, foreign investors who have been patient and have been with us for long will be allowed to reinvest their coupons.
"When you reinvest, you reinvest in 3 years and above securities. Hopefully that alleviates some pressure on the corporate debt market," Rajan said.
The Governor said that while many have been quick to cut deposit rates, not many have cut lending rates. "Eventually, competition is what matters. It is their management which decides on rate cuts. It is not regulatory intervention." he said.
"A couple of banks have cut their base rates.... Others have been quick to cut their deposit rates. Banks at some point will have to revive lending. I am hopeful it is a matter of time competition will force them to pass through these cuts. Banks are now facing competition from money market. Over time transmission will take place."
Answering a question on what he was looking for in the Budget, the RBI Governor said, "There is lot of anticipation over the fiscal path. We are not locked into any specific number but it is about the overall package that will impact inflationary forces, which is what we are worried about. The Government has the intent of producing a solid Budget."
Surprise rate cut
On the surprise 25 bps rate cut on January 15, he said the decision was led by falling inflationary expectations and data on weak commodity prices and muted rural wage growth.
“Having committed in public statements to initiate a change in the monetary policy stance as soon as incoming data permitted, the Reserve Bank cut the policy rate on January 15,” he added.
Referring to economic growth, RBI said that though revision in the base year for GDP and calculation methods will mean some revision in GDP growth numbers for 2014-15 as well as in the forecasts, growth expectations should be tempered.
“Domestic activity is likely to have remained subdued in Q3 of 2014—15, mainly reflecting the shortfall in the kharif harvest relative to a year ago but agricultural growth is likely to pick up in Q4 with the late improvement in the north—east monsoon and in rabi sowing.
“Nevertheless, growth expectations should be tempered as lead indicators such as tractor and motorcycle sales and slowing rural wage growth all point to subdued rural demand,” RBI’s monetary policy document said.
However, it noted that there is improvement in business confidence as visible from a pick—up in new investment intentions, especially in transportation, power and manufacturing.
RBI estimated the current account deficit (CAD) for 2014— 15 at 1.3 per cent of the GDP, significantly lower than the earlier projection.
“The CAD has been comfortably financed by net capital inflows, mainly in the form of buoyant portfolio flows but also supported by foreign direct investment inflows and external commercial borrowings. Accordingly, there was accretion to India’s foreign exchange reserves to the tune of USD 6.8 billion in Q3,” RBI said.