The Reserve Bank of India (RBI) left the repo rate at 8.00 percent,
as expected by nearly all 43 economists surveyed by Reuters for a
poll published last week. The repo rate has been unchanged since
January, when the RBI increased it by a quarter percentage point.
"The upside risks to the target of ensuring CPI inflation at or
below 8 percent by January 2015 remain, although overall risks are
more balanced than in June," Governor Raghuram Rajan wrote in the
RBI statement on its policy review.
"It is, therefore, appropriate to continue maintaining a vigilant
monetary policy stance as in June, while leaving the policy rate
Rajan stressed that the next goal was to bring inflation down to 6
percent by January 2016, while warning of upside risks to that
Analysts said the RBI statement could put to rest any prospect of
rate cuts for a while, with many ruling out the chances of any
reduction this year.
"I think we will be in a pause mode for an extended period of time,"
said Mohan Shenoi, treasurer at Kotak Mahindra Bank.
The RBI did, however, announce steps to free up resources for banks
to lend, a priority for Prime Minister Narendra Modi's government as
it seeks to encourage investment in order to put momentum back in
sluggish economic growth.
The central bank said it would continue to focus on spurring more
lending and lowered banks' minimum bond holding requirements, known
as the statutory liquidity ratio (SLR), by half a percentage point
to 22.0 percent of deposits to free up more money for lending,
effective from Aug. 9.
The RBI also cut the ceiling on debt that must be held-to-maturity (HTM)
by lenders half a percentage point to 24 percent.
It did not provide an estimate on how much credit growth that could
The measures come after the RBI had also cut the SLR by half a
percentage point in June.
India's benchmark 10-year bond fell, sending its yield up 9 bps to
8.82 percent, as cuts in both the SLR and HTM are likely to pressure
bond prices due to new supply.
The partially convertible rupee strengthened to 60.73/74 per dollar
versus Monday's close of 60.93/94, partly due to the RBI's caution
over the prospects for rate cuts.
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Rajan again reiterated a commitment to developing money markets
after introducing term repos, or cash for loan transactions in 7-
and 14-day increments, this year.
The RBI retained its economic growth forecast of 5.5 percent for
2014/15, depending on whether monsoons or geo-political tensions
The crucial goal for India is the creation of enough jobs to absorb
its rapidly increasing workforce, and growth of below 5 percent in
each the last two years was far below what was needed.
Industrialists have been calling for lower interest rates, but for
sustainable growth, inflation has to be conquered first, and the RBI
said there were upside risks.
In June, the retail inflation rate was the lowest since the
government started publishing the data series in January 2012, with
the consumer price index (CPI) showing a 7.31 percent rise from a
Following a weak start to the monsoon rains, food price inflation
remains one of the biggest challenges for India, despite government
measures to curb hoarding of food articles and setting limits on the
export of onions and potatoes, two staples in Indian cooking.
Rajan said the pressure was on to meet both inflation targets for
2015 and 2016.
"We are getting close to the end of the year when our first target
has to be met," Rajan told a news conference after the review. "We
need to also be confident in reaching the 6 percent (target)."
(Editing by Simon Cameron-Moore)
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