India's central bank
loosens credit to support economy, keeps rates on hold
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[June 03, 2014]
By Suvashree Dey
Choudhury and Rafael Nam
MUMBAI (Reuters) - India's
central bank kept its key policy rate on hold on
Tuesday, but 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 also hinted it would not raise interest
rates further as long as inflationary pressures continued to ease.
Governor Raghuram Rajan kept the country's key policy rate unchanged
at 8 percent, as widely expected, but reduced the mandatory amount
of bonds lenders must park at the RBI - called the statutory
liquidity ratio - by 50 basis points to 22.5 percent of deposits,
starting in mid-June.
"The decisive election result, together with improved sentiment
should ... create a conducive environment for comprehensive policy
actions and a revival in aggregate demand as well as a gradual
recovery of growth during the course of the year," Rajan said in the
"If the economy stays on this course, further policy tightening will
not be warranted," Rajan said referring to the moderating inflation
The benchmark 10-year bond yield briefly rose 5 basis points to 8.70
percent after the SLR cut announcement, but retreated on the back of
a dovish tone in the policy. Economists in a Reuters poll had
overwhelmingly expected the RBI would keep India's policy repo rate
on hold, after last raising interest rates by a quarter percentage
point in January.
The pause comes as Rajan is showing some success in bringing down
consumer price inflation (CPI) after raising interest rates by a
total of 75 basis points since September.
Except for an increase in April to 8.59 percent, retail prices have
cooled in 2014 from the near 10 percent level in the two previous
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Rajan will now have to sell his agenda - which puts priority on the
fight against inflation - to the government headed by new prime
minister, Narendra Modi, while taking steps to help it boost growth.
In turn, investors are hopeful the new government will respond by
narrowing the fiscal deficit and tackling the supply-side factors
that drive up food inflation in India, thus easing the burden on the
poor and restoring investors' confidence.
Analysts say such a concerted effort by the government could help
the RBI meet its target to bring down CPI inflation to 8 percent by
January 2015 and 6 percent the following year.
(Editing by Jacqueline Wong)
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