The Reserve Bank of India kept key policy rates unchanged as inflationary risks in the economy continue to be high.
In a media interaction, the RBI Governor, Dr D. Subbarao, said the demand pressures on inflation could re-emerge quickly given that there is not much difference between the potential growth rate and the actual growth rate. This could worsen existing supply pressures.
Dr Subbarao reiterated that interest rate is just a part of the problem and the Government must take action to ease supply-side bottlenecks.
“In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” the Governor said
RATIONALE FOR CUT
The Governor said the SLR (statutory liquidity ratio) cut will ensure that banks which need more liquidity will have it, unlike the cash reverse ratio (CRR) which has an across-the-board impact.
SLR is the amount that banks must maintain in liquid assets, such as government paper, to meet financial contingencies. The Reserve Bank cut the SLR by one percentage point to 23 per cent from 24 per cent.
This will leave the banks with an estimated Rs 60,000 crore more money to lend.
“Although the liquidity situation has eased significantly in the recent period, the SLR cut will ensure that flow of credit to productive sector is not constrained,” the RBI chief said.
He also added that, according to bankers, this cut will leave them with more headroom to lend to the retail sector. Also, cutting the SLR is in line with the long-term objective of bringing it down.
Dr Subbarao also said floating rate deposits might be necessary, important and appropriate for banks to manage their balance-sheets and for the RBI to get better monetary policy transmission.
But the single message that the RBI got from bankers was that retail depositors were not informed enough to take on something like this. Therefore, the Governor suggested that “the idea of floating rate deposits has to be floating for some more time, it cannot be a reality in the short-term.”