Inflation still a threat: RBI keeps key rates unchanged, cuts SLR by 50 bps

The Reserve Bank of India (RBI) on Tuesday kept its key policy rate unchanged, in line with the market expectations, signalling that it is too early to lower its guard against the threat of persisting inflation in Asia’s third largest economy. However, the central bank cut SLR by a sharp 50 bps to 22 percent of bank deposits and retained the cash reserve ratio at 4 percent.

The RBI kept the repo rate, at which it lends short-term funds to banks, at 8%.

“…The upside risks to the target of ensuring CPI inflation at or below 8 per cent by January 2015 remain, although overall risks are more balanced than in June. It is, therefore, appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged,” the RBI said in the press release.

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The RBI also cut the held-to-maturity ceiling for banks’ SLR securities holding to 24 percent from 24.5 percent earlier. The move is aimed at enabling “banks greater participation in financial markets”.

Of the six times Raghuram Rajan presided over the monetary policies since he took over in September, Rajan increased the key policy rate, repo, thrice by a total of 75 basis points (bps) to 8 percent and opted for status-quo in rates thrice. One bps is one hundredth of a percentage point.

Today’s announcement, which came in line with the market expectations, didn’t have much impact on the financial markets, which had factored in the move.

Inflation has been a major concern for the central bank in the recent years.

India’s retail inflation has stayed between 9 percent and 10 percent for consecutive nine months until December and above 8 percent in the subsequent months until May, before falling below 8 percent in June. Wholesale price based inflation too fell in June to 5.43 percent.

Trends in wholesale inflation are somewhat irrelevant at this point, since the RBI has officially accepted the central forecast of Urjit Patel panel that projected consumer price index (CPI) inflation down to 8 percent by January, 2015 and 6 percent by January, 2016.

The economic growth, on the other hand, has remained at sub-5 percent levels in the recent quarters.