India holds rate steady, cuts SLR to help credit flow

By Central Bank News

The Reserve Bank of India kept its benchmark repurchase rate steady at 8.0 percent, as expected, to rein in inflation expectations but trimmed the statutory liquidity ratio (SLR) by 100 basis points to 23.0 percent to encourage banks to lend more money to productive sectors of the economy.

In its first quarter review of monetary policy, India’s central bank stressed that its main task was to contain inflation to safeguard medium-term growth and a reduction in interest rates would merely stoke inflationary expectations without necessarily stimulating growth.

“While monetary actions over the past two years may have contributed to the growth slowdown – an unavoidable consequence – several other factors have played a significant role,” the RBI said.

“In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” the bank added.

The SLR dictates the amount of deposits that banks must hold in government bonds.

The RBI cut rates by 50 basis points in April, a rate cut that the Indian central bank described as front loading in view of the slowdown in growth. But from March 2010 to October 2011 the bank had been on a path of sustained rate hikes, increasing the repo rate from 4.25 percent to 8.50 percent, or by 425 basis points to contain inflation.

“Subsequent developments suggested that even as growth moderated, inflation remained sticky,” the bank said, adding this heightened risk of inflation was the reason that it kept rates on hold last month in the face of slowing growth.

Inflation, measured both as consumer and wholesale prices, average some 5.5 percent during the 2000s, down from an earlier trend rate of about 7.5 percent. The bank said it would continue to contain the perception of inflation in the range of 4.0-4.5 percent, in line with the bank’s medium-term objective of 3.0 percent inflation that is consistent with India’s integration in the global economy.

In June the key wholesale inflation rate in India was 7.25 percent, down from 7.55 percent.