Tuesday, June 3, 2014

India maintains rate but low inflation to pave way for cut

    India's central bank maintained its policy repo rate at 8.0 percent, as expected, but eased its stance slightly by trimming the statutory liquidity ratio (SLR) by 50 basis points and repeated that a further tightening of policy would not be warranted if inflation declines as expected.
    However, if the decline in inflation is faster than currently anticipated, "it will provide headroom for an easing of the policy stance," the Reserve Bank of India (RBI) said, the first strong signal that the central bank is considering rolling back total rate rises of 75 basis points since September.
    The RBI has raised its rate three times since last September, most recently in January, and said it remains committed to keeping the Indian economy "on a disinflationary course," with consumer price inflation falling to 8.0 percent by January 2015 and 6.0 percent by January 2016.
    In April India's consumer price inflation rose to 8.59 percent from 8.31 percent due to sharp increases in food prices and the RBI said some of these pressures would continue into May, but they are largely seasonal and CPI excluding food and fuel has been edging down.
    "The risk to the central bank forecast of 8 percent inflation by January 2015 remain broadly balanced," the RBI said, adding that past rate increases should slowly ease inflationary pressures.
    While the RBI left the cash reserve ratio (CRR) steady at 4.0 percent, it cut the SLR ratio to 22.50 percent from 23.0 percent of banks' net demand and time liabilities.
    The RBI also reduced the liquidity provided under the export credit refinance (ECR) facility to 32 percent from 50 percent of eligible export credit outstanding but launched a special repo term facility of 0.25 percent of NDTL to compensate for the reduction in access to liquidity under the ECR.
    The outlook for economic growth in India in the first quarter of fiscal 2014/15, which ends March 31,  remains sluggish, the RBI said.
    However, it added that the decisive election result, tougher with improved sentiment should help create a conducive environment for comprehensive policy action and a revival in aggregate demand as well as a gradual recovery of growth during the course of the year.
    The RBI retained its April forecast for Gross Domestic Product to expand to a range of 5-6 percent in fiscal 2014/15 from 4.7 percent in 2013/14, with the central estimate of 5.5 percent.


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