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Rajan holds rate, waits for govt to push growth

The Reserve Bank of India (RBI) on Tuesday left the key policy repo rate unchanged at eight per cent as inflation concerns were showing signs of abating and said a pro-growth stance could be adopted if prices rose at a slower rate than expected. This will be welcomed by a pro-growth National Democratic Alliance (NDA) government that took office last week after a landslide victory.

RBI lends money to commercial banks at the repo rate through the liquidity adjustment facility window. The cash reserve ratio, the proportion of deposits banks have to keep with RBI, was also left unchanged at four per cent.

Mindful of the need for funds when investment picks up, the central bank reduced the statutory liquidity ratio (SLR), the part of deposits banks have to invest in the government paper, by half a percentage point to 22.5 per cent and promised a further reduction with fiscal consolidation. The cut will free up about Rs 35,000 crore with banks which they can now lend.

Finance Minister Arun Jaitley complimented RBI for striking a balance between growth and inflation, a stance in sync with that of North Block. He promised to address the inflationary concerns, particularly on food prices, through supply-side measures and fiscal consolidation. He also assured the government would strive to revive the investment cycle for higher growth and employment generation.

“RBI has chosen to maintain a balance between growth and inflation while keeping the policy rates unchanged,” Jaitley said on his Facebook page. He reiterated this was also an aim of the government. “It is (also) a priority for the government to maintain a balance between growth and inflation.”

ICICI Bank Managing Director & Chief Executive Officer Chanda Kochhar said: “The reduction in SLR is a welcome signal of the commitment to reduce pre-emption of resources over time and create more room for banks to finance growth.”

Confident of a stable exchange rate as the current-account deficit narrows and foreign exchange reserves swell, the central bank partially rolled back the capital controls it had imposed last year after a rapid depreciation of the rupee. So, RBI in Tuesday increased the cap on foreign exchange remittances to $ 125,000 from $ 75,000 per financial year for individuals. It also permitted all residents and non-residents, except citizens of Pakistan and Bangladesh, to carry up to Rs 25,000 in Indian currency notes while leaving the country.

The central bank, however, lowered the liquidity provided under the export credit refinance (ECR) facility from 50 per cent of eligible export credit outstanding to 32 per cent.

“If the economy stays on this course, 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,” RBI said.

Economists interpreted this statement as a gradual shift in the central bank’s stance from strict inflation control to pushing growth since RBI Governor Raghuram Rajan took charge last September. “The tilt is towards growth, which is also evident from the reduction in SLR. The cut in SLR indicates preparing the ground for recovery,” said Abheek Barua, chief economist, HDFC Bank.

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