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Reserve Bank keeps key interest rates unchanged

RBINew Delhi, Feb 3,2015 (Agency)

As unexpectedly on his birthday, as he was with the unscheduled rate cut in January, Reserve Bank of India (RBI) Governor Raghuram Rajan Tuesday kept key interest rates unchanged in RBI's sixth bi-monthly policy review.


Fittingly, RBI deputy governor Urjit Patel described the "important backdrop" to the RBI's latest move that left analysts puzzled over whether it "was "dovish" or "hawkish."


"We are in the midst of the age of competitive depreciation and of a beggar-my-neighbour philosophy. It brings to mind an old African saying that when elephants fight the grass suffers," Patel said at the press conference to announce the policy review regarding the trend of accomodative monetary policies being adopted by developed economies," Patel said.


"While the ECB (European Central Bank) and the Bank of Japan are printing money and devaluing their currencies on one hand, the US economy is reviving on the other. Anyone in the middle is getting crushed," he added.


In an analysis of the unscheduled rate cut last month by Rajan who, in 2005, had predicted the 2008 financial meltdown that is still affecting global economy, IANS had pointed out that slmost a decade later Rajan is stronger in his belief that global markets now are at the risk of a crash due to the competitive loose monetary policies being adopted by developed economies.


"We have maintained the status quo (on interest rates). We have taken action on other fronts," RBI Governor Raghuram Rajan said Tuesday.


"We will await for more data and fiscal developments to come in and after that we will make judgement," Rajan added.


Asked about the lack of a forward guidance in the policy review, Rajan said: "The guidance remains what it was when we cut rates. Further action will depend on developments on the fiscal front and on the disinflationary process."


"Monetary policy is a long-term process. You can't hold me every 15 days saying when are you cutting rates. We have a budget coming up. Inflation data also is yet to come," he added.


The repo rate remains unchanged at 7.75 percent. The reverse repo rate, or the interest that the RBI pays to commercial banks when they park their surplus short-term funds with the central bank, has been maintained at 6.75 percent.


On Jan 15, the apex bank cut the repo rate by 25 basis point from 8 percent to 7.75 percent.


Meanwhile, the RBI reduced the statutory liquidity ratio (SLR) which is the mandatory amount of cash, gold, bonds or other securities that banks must keep with it.


The SLR has been reduced by 50 basis points to 21.5 percent of their net demand and time liabilities (NDTL) effective from the fortnight beginning Feb 7, 2015.


The Reserve Bank also reduced the eligibility limit for foreign exchange remittances under the liberalised remittance scheme (LRS).


"On a review of the external sector outlook and as a further exercise in macro prudential management, it has been decided to enhance the limit under the LRS to $250,000 per person per year."


In the monetary policy statement Governor Rajan indicated that the upside risks to inflation stem from unlikely fiscal slippage, uncertainty over the distribution of the monsoons during 2015 and the low probability of reversal in crude oil prices.


Expressing understanding of the Reserve Bank's decision to hold interest rates in course of its scheduled policy review Tuesday, India Inc asked the central bank and the government to "nudge" banks to transmit onward benefits of the rate cut made last month.


"Appreciating the fact that RBI Governor Raghuram Rajan would like to wait for the Budget and the GDP data to come before he makes his next move on the policy interest rates, the central bank should really nudge the banks to do effective transmission of the rate cuts which have already taken place," The Associated Chambers of Commerce of India (Assocham) said in a statement.


"The banks must be nudged if not by RBI, at least by the finance ministry," he added.


Jyotsna Suri, president, Federation of Indian Chambers of Commerce and Industry (FICCI) said: "Following a cut in the repo rate introduced last month, RBI has introduced a cut in the SLR rate by 50 basis points. This is a clear indication to the banking sector to make liquidity and funds available for productive purposes such as investments to spur growth."


 Ajay S.Shriram, president, Confederation of Indian Industry (CII) said the decision reflects a cautious approach of the RBI while tackling the growth-inflation conundrum.


"CII however welcomes the lowering of the statutory liquidity ratio by 50 bps which, by easing liquidity in the system, would ensure that funds would be available to the banking sector for onward lending. This in turn would provide a fillip investment and growth" Shriram said.


International accounting firm KPMG in India partner Shashwat Sharma said: "We appreciate RBI's watchful approach on awaiting for structural changes by the Government in the domestic economy before announcing further interest rate cuts. The SLR reduction should hopefully propel more growth in the economy."

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