The RBI has kept policy rates unchanged in its second bimonthly monetary policy statement released on June 3, but reduced SLR from 23 per cent of NDTL to 22.5 per cent to release more money (around Rs. 40,000 crore) for private sector lending, an apparent move to facilitate recovery in economic activity. Thus, policy repo rate under LAF remains at 8 per cent, reverse repo 7 per cent, MSF and bank rate 9 per cent, and CRR 4 per cent. By the way, because of various reasons, as on May 16, SCB holding of government securities was much higher at around 29 per cent of banks’ deposits, with incremental SLR working out to about 26 per cent of annual increase in deposits.

The other measures taken on “an assessment of current and evolving macroeconomic situation” include:

  • Reduction in liquidity provided under the export credit refinance (ECR) facility from 50 per cent of eligible export credit outstanding to 32 per cent.
  • Introduction of a special term repo facility of 0.25 per cent of NDTL to compensate for the reduction in access to liquidity under the ECR.
  • Continuing to provide liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.
  • Permitting foreign portfolio investors to participate in the domestic exchange traded currency derivatives market to the extent of their underlying exposures plus an additional $10 million, extending similar access to domestic entities also.
  • Restoring eligibility limit for foreign exchange remittances under the Liberalised Remittance Scheme (LRS) to $125,000 from $75,000, without end use restrictions except for prohibited foreign exchange transactions such as margin trading, lottery and the like.
  •   Allowing residents and non-residents except citizens of Pakistan and Bangladesh to take out Indian currency notes up to Rs. 25,000 while leaving the country.

Operational guidelines covering last three measures would be issued separately.

Policy stance and assessment
CPI headline inflation rose in March and April due to sharp increase in food prices. Some of this price pressure would continue into May, but it would be largely seasonal. Moreover, CPI inflation excluding food and fuel has been edging down. The risks to the central forecast of 8 per cent CPI inflation by January 2015 remain broadly balanced. Upside risks include a sub-normal/delayed monsoon, geopolitical tensions and their impact on fuel prices, and uncertainties surrounding the setting of administered prices, which are likely to be balanced by downward risks from possibility of stronger government action on food supply and better fiscal consolidation and pass through of recent exchange rate appreciation in domestic prices.

The apex bank has, however, reiterated its commitment to keeping the economy on a disinflationary path, taking CPI inflation to be 8 per cent by January 2015 and 6 per cent by January 2016. If the economy stays on this course, says RBI, 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.

The growth projection for FY15 remains within 5-6 per cent range, with risks evenly balanced around 5.5 per cent even as lead indicators suggest sluggish economy in Q1. The outlook for the agricultural sector is contingent upon the timely arrival and spread of the monsoon. Easing of domestic supply bottlenecks and progress in the implementation of stalled projects should brighten the outlook for both manufacturing and services. As world trade gathers momentum, the prospects for exports should improve further.


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