He marginally reduced the Statutory Liquidity Ratio (SLR), indicating that he will await signals from the national budget next month before acting.

This is the second consecutive time that Rajan has kept interest rates unchanged, belying hopes of any reduction in EMIs for home and auto loans.

The repo rate, at which the RBI lends to banks, has been retained at 8 percent, while the SLR for banks has been cut by 0.5 percent to 22.5 percent with effect from June 14. The cash reserve ratio for banks has been kept unchanged at 4 percent.

"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," Rajan said while unveiling the second bi-monthly Monetary Policy Statement for 2014-15.

Consumer Price Index (CPI) inflation, excluding food and fuel, has moderated gradually since September 2013 although it is still elevated, he said.

Rajan, who has increased the repo rate thrice since September, said no more tightening would be warranted if the economy stays on a disinflationary course. He added that the RBI may also consider a cut if the disinflation process is faster than anticipated.

Rajan reiterated the RBI's commitment to its target of getting CPI inflation, which accelerated to 8.59 percent in April, down to 8 percent by January 2015 and 6 percent by the year after.

On growth, Rajan maintained the RBI's median estimate of GDP expansion coming in at 5.5 percent for this financial year.

The stance to be adopted by the Reserve Bank was keenly awaited, especially after the formation of a government perceived to be pro-growth at the Centre.

The RBI Governor met Finance Minister Arun Jaitley the day he took charge at North Block and also called on Prime Minister Narendra

Modi before the release of data that showed the economy expanded 4.7 percent in FY14 compared with 4.5 percent in FY13.

However, the persistence of inflation, especially on the food front, was one of the factors considered detrimental for the RBI in being accommodative in its stance.

Fears of inadequate monsoon rains due to the El Nino factor may only add to price pressures in the future.

Rajan also announced a reduction in liquidity provided under the export credit refinance facility to 32 percent of eligible export credit outstanding from 50 percent earlier.

READ MORE: Experts opinion on RBI’s monetary policy review ; Sensex, Nifty at new highs as RBI injects liquidity

However, it introduced a special term repo facility of 0.25 percent of net demand and time liabilities to compensate fully for the reduction in access to liquidity under export credit refinance with immediate effect.

The apex bank also permitted all residents and non-residents, except citizens of Pakistan and Bangladesh, to carry up to Rs 25,000 in Indian currency notes while leaving the country. The current limit for carrying domestic currency notes for Indians travelling overseas is Rs 10,000.

To enhance depth in the foreign exchange market, the RBI allowed foreign portfolio investors to participate in the domestic exchange-traded currency derivatives market, a segment where volumes have declined.
    
The central bank reduced the availability of funds under the export credit refinance window from 50 percent of export credit outstanding to 32 percent.

The BSE benchmark Sensex jumped by nearly 174 points to end the day at all-time closing high of 24,858.59 as sentiment remained positive after the RBI announced the policy review.

Mixed reactions on RBI move

Bankers said the RBI's decision to hold key rates, coming after a decisive mandate received by Narendra Modi government, was on expected lines and interest rates won't change even though the central bank's SLR cut infuses additional liquidity into the system.

According to India Inc, a cut in key rates would have been propitious for growth. It hailed the central bank's move to slash SLR, saying it will give more room to banks for onward lending to the corporate sector. The industry also emphasised on supply-side interventions by the government to tackle persistently high food inflation.

Exporters are divided over the impact of the Reserve Bank's move to reduce availability of funds under the export credit refinance (ECR) window.

Expressing disappointment over the RBI's monetary policy, realtors body CREDAI sought cut in interest rates on home loan to boost housing demand.

Finance Minister Arun Jaitley: The central bank has adopted a "calibrated approach" in its bi-monthly monetary policy.

State Bank of India Chairperson Arundhati Bhattacharya: The SLR of banks exceeds the current required proportion and the reduction in the level will not have an immediate effect. It is a signal for liquidity easing that interest rates are unlikely to go down in the short term.
    
ICICI Bank Managing Director Chanda Kochhar:
The decision to hold rates reflects the current level of inflation as well as the expectation of policy and administrative actions from the government in the coming months to address inflation as well as boost growth.

Bank of Baroda CMD S S Mundra: This was very much on expected lines and what is important is the consistency which the RBI has shown in its moves, like the focus on the consumer price inflation number and a clear articulation of the guidance. The SLR cut is not very surprising as the RBI had already hinted that in the medium to long term, its intention was to bring it down to help productive sectors.
    
Indian Overseas Bank CMD M Narendra: My bank is not considering any rate change even though I get about Rs 1,600 crore released because of the SLR cut and the decision to reduce the export credit refinance (ECR) limit to 32 percent from 50 percent. The ECR decision was on expected lines as the RBI had already said it wants to make it market-linked over time.
    
Shailendra Bhandari, MD and CEO of ING Vysya: 
It is a ‘neutral to dovish’ policy announcement. We see stability and steady policy stance even as the overall approach of the policy is neutral to dovish.

Ficci President Sidharth Birla: While we expect the government to attack food inflation through administrative and policy fixes from the supply-side, we would have appreciated the central bank facilitating a revival of capital expenditure cycle by exhibiting a softer stance on policy rates.

CII Director General Chandrajit Banerjee: CII recognises the concerns about inflation that have restrained RBI from reducing key policy rates but by easing liquidity in the system by lowering SLR it has ensured that funds would be available to the banking sector for onward lending which in turn would push investment and growth.
    
Assocham President Rana Kapoor: While SLR cut by 50 bps will make available a little more money for lending by banks, the issue facing the industry at this point of time is not so much of liquidity but the cost of borrowing. With robust foreign inflows, the system has ample liquidity.

PHD Chamber of Commerce President Sharad Jaipuria:
A reduction in the SLR will give banks more freedom to expand credit to the non-government sector.

Federation of Indian Export Organisations (FIEO) President M Rafeeque Ahmed:
It will affect both the availability and cost of credit, which will be detrimental to competitiveness of Indian exports at a time when global economy is gathering momentum. Banks would be reluctant to lend to the export sector, which is already facing liquidity crunch, as share of exports credit in net bank credit has come down drastically from close to 9 percent to 3.5 percent in last 10 years.

EEPC India Chairman Anupam Shah:
The change in the export refinance system would not make a significant difference to the exporting sector insofar as the cost of borrowing is concerned.

Confederation of Real Estate Developers' Associations of India (CREDAI) National President C Shekar Reddy: We appreciate the positive step taken by RBI to reduce SLR by 50 bps, which will release a liquidity of Rs 39,000 crore for the banks. We understand the central bank's priority to fight inflation. However, at the same time real estate industry also awaits proactive measures to stimulate the home purchase by bringing down the home loan rate.

CREDAI Chairman Lalit Jain: A long term status quo on interest rates would not help prospective home buyers. To provide shelter and to move the economy we have to work towards home loan rate reduction. Also, RBI has to consult CREDAI and develop a practical policy on lending to housing projects.

CBRE South Asia Chairman & MD Anshuman Magazine: This status quo decision will bring in more stability on home loan interest rates. The move could also be seen as an indication of an economic recovery.

RICS South Asia Managing Director Sachin Sandhir: The announcement of keeping the key policy rates unchanged comes on expected lines. A low and stable inflation is a necessary pre-requisite for any rate revision.
    
Parsvnath Developers Chairman Pradeep Jain: The policy was on the expected line. As the Union Government is about to present its first budget in a month’s time, it gives valid reasons to RBI to be cautious.

RBI MONETARY REVIEW: HIGHLIGHTS

 

•    Short-term lending (Repo) rate unchanged at 8 percent Cash reserve ratio (CRR) unchanged at 4 percent
•    SLR cut by 0.50 pc to 22.5 pc to unlock banking funds
•    Expect economic growth for 2014-15 to be between 5-6 percent
•    Further policy tightening will not be warranted if inflation continues to decline
•    Reiterates CPI inflation target of 8 percent by January 2015, 6 percent by 2016
•    Decisive election results should help bring in gradual recovery of growth
•    Farm sector outlook clouded by forecast of delay in monsoon
•    Export credit refinance facility cut to 32 percent from 50 percent
•    FPIs allowed in currency derivative market
•    Indians as well as non-residents can carry up to Rs 25,000 while leaving country
•    This facility not valid for citizens of Pakistan and Bangladesh
•    Next bi-monthly policy statement on August 5
•    Hikes eligibility limit for forex remittances to USD 1, 25,000, from USD 75,000 at present

RBI steps in to check rupee gains

The Reserve Bank of India was spotted buying dollars via state-run banks starting around 59.16, two traders said.

The rupee was at 59.2050/2100 per dollar by 12:30 p.m., off its session high of 59.12. The currency closed at 59.1525/1625 on Monday.

The rupee had briefly trimmed its losses after the RBI left its key policy rate on hold on Tuesday, and eased rules to spur bank lending in a move set to be welcomed by the new pro-business government as it seeks to revive economic growth.

RBI eases some additional provisioning rules on unhedged FX exposure

The Reserve Bank of India allowed banks to distribute the additional provisioning on unhedged foreign currency exposure equally in the current fiscal year instead of providing the entire amount in the June quarter, it said.

However, it declined such a relaxation on overall capital requirements.

The RBI also clarified that incremental provisioning for unhedged forex exposures will be treated as general provisioning under Tier II capital.

Incremental provisioning on such exposures would require banks to provide 10 basis points over and above standard asset provisioning, the RBI said.

Since Rajan took the helm of the central bank in September last year, he has raised the repo rate by 75 basis points in a bid to tame high consumer inflation.

Finance Minister, in a Facebook posting on Monday, has stressed on reviving growth momentum and containing inflation.
India's economic growth remained below the 5 percent mark for the second year in a row at 4.7 percent in 2013-14, although industry is hopeful of a rebound with a stable government headed by Modi.

The Reserve Bank of India was spotted buying dollars via state-run banks starting around 59.16, two traders said.

The rupee was at 59.2050/2100 per dollar by 12:30 p.m., off its session high of 59.12. The currency closed at 59.1525/1625 on Monday.

The rupee had briefly trimmed its losses after the RBI left its key policy rate on hold on Tuesday, and eased rules to spur bank lending in a move set to be welcomed by the new pro-business government as it seeks to revive economic growth.

The Reserve Bank of India allowed banks to distribute the additional provisioning on unhedged foreign currency exposure equally in the current fiscal year instead of providing the entire amount in the June quarter, it said.

However, it declined such a relaxation on overall capital requirements.

The RBI also clarified that incremental provisioning for unhedged forex exposures will be treated as general provisioning under Tier II capital.

Incremental provisioning on such exposures would require banks to provide 10 basis points over and above standard asset provisioning, the RBI said.

JPN/Agencies

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