RBI douses hopes of rate cut in near future

Inflation forecast raised, growth projection cut SLR reduction provides room on retail loan rates

The Reserve Bank of India (RBI) on Tuesday left its key policy rate unchanged at eight per cent in line with expectations, but its sharp tone on inflation doused all hopes of any monetary easing in the near future as well.

The central bank’s policy dilemma was clear from the monetary policy statement: it cut its economic growth forecast for the fiscal year to March 2013 and at the same time raised its inflation forecast. While the GDP growth projection for 2012-13 has been lowered to 6.5 per cent from the 7.3 per cent estimated before the onset of the monsoon, the inflation projection for end-March has been increased to seven per cent from six per cent. “In the current circumstances, lowering policy rates will only aggravate inflationary impulses, without necessarily stimulating growth,” Governor D Subbarao said, adding the central bank’s primary focus was inflation control.

The RBI left its policy repo rate at eight per cent and the cash reserve ratio for banks at 4.75 per cent. The CRR is the share of deposits banks must keep with the RBI.

The RBI reduced the banks’ statutory liquidity requirement (SLR) to 23 per cent from 24 per cent, effective August 11. That reduces the portion of deposits banks need to invest in liquid instruments, mainly government bonds, and frees up more funds for banks to lend. The SLR reduction, expected to infuse Rs 60,000 crore liquidity in the system, will enable banks to reduce lending rates in the retail segment.

“There would be a transfer of resources from the SLR to the real sector (private or public). I think this credit (by freeing of SLR) would largely go to retail. To attract customers, there will be a reduction in rates,” State Bank of India Chairman Pratip Chaudhuri said.