RBI keeps key policy rates intact, ups SLR by 100 bps

Cautions that inflation rate is likely to increase in near future

While announcing its quarterly review of the Credit Policy 2009-10 this morning, the apex bank has chosen to keep all key rates intact. 

Accordingly, the cash reserve ratio (CRR) – the minimum amount banks need to park with RBI without any interest for it — remained unchanged at 5 per cent, while the repo and reverse repo rates too were left unchanged at 4.75 per cent and 3.25 per cent respectively.

Repo and reverse repo are the rates at which RBI lends to banks and vice versa while SLR is the minimum amount of cash, gold or bonds banks need to maintain with themselves.
 
The RBI, however, has warned about the possibility of higher inflation. After remaining below one per cent for five consecutive weeks and at sub-zero levels for 13 weeks in a row, the wholesale-price based inflation rose to 1.2 per cent as on October 10 on account of increasing food prices. Surging food prices, global trend in commodity prices and domestic demand-supply imbalances, are expected to escalate the headline inflation in the months ahead, the central bank said, adding that it will “keep a vigil on inflation” and was prepared “to respond swiftly and effectively to stabilize inflation expectations.”

“Keeping in view the global trend in commodity prices and the domestic demand-supply balance, the baseline projection for wholesale price index (WPI) inflation at end-March 2010 is placed at 6.5 percent with an upside bias,” it said. RBI had earlier projected the inflation rate at 5 per cent.

Rise in SLR

Later briefing reporters, RBI Governor D Subbarao, said the decision to raise SLR is aimed at reducing liquidity and fighting the inflationary expectations, which has started building up, especially in the case of food items.  He said that since commercial banks are presently maintaining SLR investments at 27.6 per cent the hike in SLR will not impact liquidity position of the banking system and credit to the private sector.

With the hike in SLR, bankers aver that RBI may be signalling its leaning towards tightening the accommodative monetary policy but RBI Governor takes a view that the decision to raise SLR was not reformist but regulatory in nature.

RBI has discontinued two unconventional refinance facilities – like special refinance facility for commercial banks and special term repo facility for commercial banks especially for funding to mutual funds, NBFCs and housing finance companies.

Global outlook

“There has been a discernible improvement in the global economic outlook since the First Quarter Review in July 2009,” RBI Governor Duvvuri Subbarao said, in his review statement. “In India too, there are definitive indications of the economy reverting to the growth track. Accordingly, attention around the world, as also in India, has shifted from managing the crisis to managing the recovery.”
 To curb the risk of lending to realty sector RBI in its review increased the provisioning requirement for advances to the commercial real estate sector classified as ‘standard assets’ from the present level of 0.40 per cent to 1 per cent, a move that will make lending to the sector tougher. He said price adjustment in the commercial realty sector has not taken place as prices have not fallen enough.


RBI forecast too moderate: FM

Finance Minister Pranab Mukherjee, on Tuesday , forecast a 6.5 to 6.75 per cent economic growth rate in the current fiscal while terming the 6 per cent forecast by Reserve Bank of India ‘too conservative’, reports DHNS from New Delhi.

Briefing reporters, he said, I am more inclined to accept projection made by Prime Minister’s Economic Advisory Council as RBI always makes very hard and conservative assessment,” while reacting to RBI’s Monetary Policy Review.

Stimulus to stay

He asserted that the government would continue the ongoing stimulus packages till the economy was on a “very firm” recovery growth path.