Monetary Policy Statement
Dt.03-Jun-2014
By Dr. Raghuram G Rajan, Governor, RBI
The Monetary Policy statement made
by the RBI Governor today has generally been welcomed by the people and the Government.
The Monetary and Liquidity Measures of
the RBI include the following :
1. the policy repo rate under the
liquidity adjustment facility (LAF) remains unchanged at 8.0 per cent;
2. the cash reserve ratio (CRR) of
scheduled banks remains unchanged at 4.0 per cent of net demand and time
liabilities (NDTL);
3. the statutory liquidity ratio (SLR)
of scheduled commercial banks is reduced by 50 basis points from 23.0 % to 22.5
% of their NDTL with effect from the fortnight beginning June 14, 2014;
4. the liquidity provided under the
export credit refinance (ECR) facility is reduced from 50 % of eligible export
credit outstanding to 32 % with immediate effect;
5. a special term repo facility of 0.25
% of NDTL is introduced to compensate fully for the reduction in access to
liquidity under the ECR with immediate effect; and
6. to continue to provide liquidity
under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking
system.
7. Consequently, the reverse repo rate
under the LAF will remain unchanged at 7.0 per cent, and the marginal standing
facility (MSF) rate and the Bank Rate at 9.0 per cent.
These decisions of RBI are based on
the detailed assessment given by the RBI below the Policy decisions. Some of
these are summarized below :
·
Retail
inflation measured by the consumer price index (CPI) increased for the second
consecutive month in April, pushed up by a sharp spike in food inflation,
especially in the prices of fruits, vegetables, sugar, pulses and milk. CPI
inflation excluding food and fuel has moderated gradually since September 2013
although it is still elevated.
·
In
March and April, CPI headline inflation has risen on the back of a sharp
increase in food prices. Some of this price pressure will continue into May,
but it is 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 in the form of a
sub-normal/delayed monsoon on account of possible El Nino effects,
geo-political tensions and their impact on fuel prices, and uncertainties
surrounding the setting of administered prices appear at this stage to be
balanced by the possibility of stronger Government action on food supply and better
fiscal consolidation as well as the pass through of recent exchange rate
appreciation. Accordingly, at this juncture, it is appropriate to leave the
policy rate unchanged, and to allow the disinflationary effects of rate
increases undertaken during September 2013-January 2014 to mitigate
inflationary pressures in the economy.
·
The
Reserve Bank remains committed to keeping the economy on a disinflationary
course, taking CPI inflation to 8 per cent by January 2015 and 6 per cent by
January 2016. If the economy stays on this course, 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.
·
As
the economy recovers, investment demand and the need for credit will pick up.
To the extent that this contributes eventually to supply, it is important that
banks have the room to finance it. A reduction in the required SLR will give
banks more freedom to expand credit to the non-Government sector. However, the
Reserve Bank is also cognisant of the significant on-going financing needs of
the Government. Therefore, the SLR is reduced by 0.50 per cent of NDTL, with
any further change dependent on the likely path of fiscal consolidation.
·
With
a view to improving the depth and liquidity in the domestic foreign exchange
market, it has been decided to allow foreign portfolio investors to participate
in the domestic exchange traded currency derivatives market to the extent of
their underlying exposures plus an additional US$ 10 million. Furthermore, it
has also been decided to allow domestic entities similar access to the exchange
traded currency derivatives market. Detailed operating guidelines will be
issued separately.
·
As
a prudential measure, the eligibility limit for foreign exchange remittances
under the Liberalised Remittance Scheme (LRS) had been reduced to US$ 75,000
last year. In view of the recent stability in the foreign exchange market, it
has been decided to enhance the eligible limit to US$ 125,000 without end use
restrictions except for prohibited foreign exchange transactions such as margin
trading, lottery and the like. Operating guidelines will be issued separately.
·
At
present, only Indian residents are allowed to take Indian currency notes up to Rs.10,000
out of the country. Non-residents visiting India are not permitted to take out
any Indian currency notes while leaving the country. With a view to
facilitating travel requirements of non-residents visiting India, it has been
decided to allow all 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. Operating guidelines in this regard are being issued separately.
·
The
third bi-monthly monetary policy statement is scheduled on Tuesday, August 5,
2014.
MY COMMENTS :
The reduction of SLR by 50 Basis
Points is especially welcome. As the Modi Government takes measures to spur
investment in the economy, demand for Funds from Industries is likely to
increase significantly. Likewise, demand for Loans in respect of Auto, Home
Loan and FMCG sectors, as also Infrastructure sector are bound to increase.
Many present uncertainties in asset creation efforts are gradually receding and
India can hope to see greater participation of companies in Nation Building and
productive activities.
In this scenario, reduction of SLR
and release of more funds to the Banks for loans is most welcome. While Private
sector Banks will seize the opportunity immediately and efficiently, Public
sector Banks also will see greater demand for loans coming from various
sectors. But, they must be ever cautious about the NPAs in this scenario.
In respect of Repo and reverse repo
rates, my views are that, these rates have had very little impact on Inflation.
In the last 3 years, RBI was trying to use these rates to bring down Inflation.
But, to my knowledge, there has been absolutely NO EFFECT of rate increases on
Inflation during all these years.
I am sure that any future RATE
INCREASES also will have NO BENEFICIAL IMPACT on Inflation.
On the other hand, these rate increases
have stunted Growth across various sectors of economy. Today, if there is no
investment demand from Industries for funds of the Public sector Banks, the
major reason is the High Rate structure currently existing in India. Thus, Rate
increases had no effect on Inflation, but, had highly adverse impact on Growth
in various sectors.
Therefore, without waiting for
Government action on Inflation and without waiting for rate increases to bring
down Inflation, (the latter will not be happening at all, in future also as seen
from the past experience), the RBI must start decreasing the Rates gradually.
The Government must of course,
implement various policy measures to enhance supply of commodities facing
inflationary spiral, impose administrative action to control prices of
essential commodities, make all possible efforts to remove bottlenecks in the
supply chain and undertake imports wherever needed.
The Centre must also sensitize the
States in respect of these supply side and administrative measures. For this
purpose, the Centre must convene a meeting of the Food and Agri Ministers
and secretaries and finalize concrete measures for controlling Inflation
(preferably commodity-wise) at both centre and state levels.
Once these measures are initiated,
RBI must bring down its policy rates so that Growth will start taking Place. We
have not been seeing any construction and expansion demand in India for a long
time now and this is not healthy for the Economy. Primary issues have dried up
almost totally in the last 3 years. This is not the healthy sign of a
DEVELOPING ECONOMY.
Inflation must come down. This must
be TOP PRIORITY for the Government (and
not for RBI). But, RBI’s Policy Rates must come down independent of Inflation.
I do not subscribe to the view that RBI Rates are in any way able to impact
Inflation one way or the other. This has not been the experience of India in
last 3 years.
All other measures and views in the
RBI’s Policy statement of Today are most welcome.
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