Mumbai: The policy rates were left unchanged despite headline inflation being high and fuelled by food inflation for two successive months of March and April much to the relief of India Inc and the markets as RBI governor Raghuram Rajan was confident that the Narendra Modi government could handle the risks to inflation. In his second bi-monthly policy statement 2014-15 announced on Tuesday, Dr Rajan said that “the stronger government action on food supply and better fiscal consolidation as well as the pass through of recent exchange rate appreciation,” would enable the Narendra Moldi government to handle the upside risks to inflation from the possible El Nino effect, a delayed/sub-normal monsoon and external risks from geo-political tensions that could impact high fuel prices.
Accordingly he said, at this juncture, “it is appropriate to leave the policy rate unchanged and to allow the disinflation effect of the rate increases undertaken during September 2013- January 2014 to mitigate inflationary pressures in the economy. He held out a hope of policy easing if the disinflation process is faster than anticipated. Dr Rajan however reduced the statutory reserve ratio (the amount banks have to keep in government securities before lending) by 50 basis points from 23 per cent to 22.5 per cent. This is expected to release Rs 40,000 crore of liquidity.
While India Inc has generally welcomed this, Assocham president Rana Kapoor said, “the issue facing the industry is not so much of liquidity but the cost of borrowing. With robust foreign inflows, the system has ample liquidity”. The governor’s tone in his statement was dovish and in deep contrast to his hawkish statements since he took over the reins of monetary policy in September 2013. While retaining the April projection of GDP at 5.6 per cent for 2014-15, he said “Easing of domestic supply bottlenecks and progress in the implementation of stalled projects should brighten the outlook for manufacturing and services. The resumption of export growth is a positive development.” Continuing the structural changes he has cut export credit refinance facility from 50 per cent of eligible export credit outstanding to 32 per cent but allows exporters to tap a special repo facility.
