Tuesday, June 3, 2014


Monetary Policy Statement


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.


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.

*  *  *  E  N  D  *  *  *