RBI keeps repo rate unchanged to control inflation, cuts SLR by 50 bps

The Reserve Bank of India (RBI) on Wednesday reduced the statutory liquidity ratio (SLR), which determines the amount of money that is mandatory for banks to invest in government bonds, by 0.5 per cent to 19.5 per cent, freeing over Rs 57,000 crore in hitherto blocked funds that can now be given out as loans. "As a part of the transition to a liquidity coverage ratio (LCR) of 100 per cent by January 1, 2019, it is proposed to reduce the SLR by 0.5 per cent from 20 per cent to 19.50 per cent of banks from the fortnight commencing Oct 14,'' the RBI said in its bi-monthly monetary policy review.

The RBI had lowered the SLR by 0.5 per cent in the last monetary policy review in June. However, the RBI held its policy rate steady at 6 per cent to control rising inflation. While it was widely expected that the RBI would keep a status quo, India Inc. and the government were keen on a cut in interest rates to spur growth. The SLR cut and a monetary policy statement seen as hawkish, since it focused more on controlling inflation than growth, sent bonds sharply lower, but the rupee and stock markets rose on Wednesday.

In focusing on measures that target banks to support the economy, the RBI signalled its unwillingness to use stronger monetary policy tools like a cut in interest rates after consumer inflation hit a five-month high of 3.36 percent in August, not far from the central bank's 4 per cent target. The RBI said it would thus keep its policy stance at "neutral," and raised its price projection for October-March to a range of 4.2 to 4.6 percent, above its inflation target and above its previous forecast for around 4.0 to 4.5 percent.

Five members of the committee, including Governor Urjit Patel, voted to keep rates unchanged, while Ravindra Dholakia, a prominent dovish member of the panel, voted for a cut of at least 0.25 per cent. The RBI also kept the reverse repo rate unchanged at 5.75 percent. The benchmark 10-year bond yield rose to as much as 6.71 percent, the highest since May 19, from its previous close of 6.65 percent. But the rupee strengthened to as much as 64.95 per dollar from its close of 65.49, while the NSE share index ended up 0.6 percent.

The RBI also reiterated its policy priority is to keep inflation at around 4 per cent "on a durable basis", the midpoint of its mandated target of 2 to 6 percent. It cited a slew of concerns on inflation, including rising food costs, price revisions after the recent implementation of a national goods and services tax, and stubbornly high core prices.

The RBI has repeatedly asking banks to pass on all of its interest rate cuts to customers and coaxing them into lending more. However, since the sector is stuck with around Rs 8 lakh crore in bad loans, bankers have long sought to protect profit margins and have not passed on interest rate cuts to corporates and consumers. RBI Governor Urjit Patel suggested the economy could rebound from the previous quarter, pointing to indicators such as improving industrial output, suggesting the central bank did not need cut rates again at this juncture.

The Reserve Bank of India (RBI) on Wednesday kept the repo rate unchanged at 6 per cent, maintaining the status quo in its 4th bi-monthly monetary policy statement. RBI's decision today goes against the wishes of industry bodies and government which were looking for a rate cut to spur economic growth and private investment. The central bank also revised real GVA growth projection for 2017-18 down to 6.7 per cent from the August 2017 projection of 7.3 per cent.

Meanwhile, India Inc expressed its disappointment with the RBI's decision to hold key policy rates unchanged. "In context of the current industrial situation, we felt there was a need for a further cut in the repo rate. Growth conditions remain under strain which is reflected in the persistently weak investment activity and the first quarter GDP growth numbers," Ficci President Pankaj Patel said.

"While RBI in the policy statement cites inflationary pressures to remain a concern, Ficci feels that we need to give equal consideration to growth prospects," Patel added. 

The MPC expects inflation to rise from current level to 4.2 to 4.6 in the second half of this fiscal year. The teething problems related to Goods and Service Tax (GST) may get resolved in second half, RBI Governor Urjit Patel said during the press briefing following the MPC meet.