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Credit Policy: RBI leaves rates intact, cuts SLR by 50 bps

The News International Team

In its sixth bi-monthly Monetary Policy review, the Reserve Bank of India kept policy rates unchanged after easing monetary policy just three weeks ago, suggesting government’s  annual budget at the end of this month may hold the key to future action. However it announced a cut in SLR by 50 bps from 22 percent to 21.5 percent of their NDTL with effect from February 7, 2015. This is ostensibly done to create space for banks to expand credit, “Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth,” the statement said.

As a result, policy repo rate under remains unchanged at 7.75 percent, cash reserve ratio (CRR) at 4 percent, reverse repo rate at 6.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75 percent.

The policy also announced replacement of the export credit refinance (ECR) facility with the provision of system level liquidity with effect from February 7, 2015. RBI will continue to provide liquidity under overnight repos of 0.25 percent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 percent of NDTL of the banking system through auctions

Although Mr Rajan did not give forward guidance for the next  monetray policy, he insisted it remains same as the January 15 guidance. The RBI will be waiting for datas like upcoming GDP numbers, inflation numbers and the Union Burget few week later for future actions. Post the status quo policy, Bank Nifty crashed nearly 100 points.

Meanwhile, India’s foreign exchange reserves swelled to USD 6.8 billion in Q3 since CAD was comfortably financed by net capital inflows. CAD for 2014-15 is estimated at 1.3 percent of the GDP.

Here’s what the RBI says about the following key points:

On Inflation

The RBI said the upside risks to inflation stem from the unlikely possibility of significant fiscal slippage, uncertainty on the monsoon during 2015 as also the low probability but highly influential risks of reversal of international crude prices due to geo-political events. It pegs inflation at target level of 6 percent by January 2016.  The December Consumer Price Inflation (CPI) had edged up to 5 percent, compared to 4.38 percent in the previous month but softening of cereal prices and a sharp seasonal fall in vegetables prices moderated the trajectory of headline inflation. However, seasonal increases in vegetable prices in March have to be monitored carefully, RBI said.


The RBI noted that the massive quantitative easing by the European Central Bank (ECB) has reinvigorated financial risk taking, boosting stock markets across the world, even though many market participants have read the softness in crude prices and the ECB’s announcement as signifying a weaker global economic outlook. It observed that bond yields in advanced economies have fallen to historic lows since there is a growing belief that the US Fed will stay on hold longer than previously thought. Rajan warned that financial markets are vulnerable to uncertainty surrounding monetary policy normalization in advanced economies, weaker growth in China as well as oil exporting EMEs.

On Growth post GDP Base revision

The revision in the base year for GDP and GDP calculation methods will see revision in GDP forecasts. The policy observed that domestic activity is likely to have remained subdued in Q3 of 2014-15, reflecting the shortfall in kharif harvest relative to a year ago. It however, sees a possible pick up in agricultural growth in Q4 with the late improvement in the north-east monsoon and in rabi sowing. The policy points out that lead indicators of growth, such as tractor and motorcycle sales and slowing rural wage growth reflecting subdued rural demand. Additionally, continuing contraction in consumer goods production underscores the persisting weakness in consumption demand. Indirect tax collections, non-oil non-gold import growth, expansion in order books, and new business reported in purchasing managers surveys point to a modest improvement in the months ahead.

The first bi-monthly monetary policy statement for fiscal year 2015-16 is scheduled on Tuesday, April 7, 2015.


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