Dr Rajan waits, watches

Dr Rajan has kept key policy rates unchanged in the sixth bi-monthly monetary policy

Update: 2015-02-04 00:45 GMT
RBI Governor Raghuram Rajan (Photo: DC archives)

RBI governor Raghuram Rajan is back in wait-and-watch mode but has promised further action on monetary easing contingent on how finance minister Arun Jaitley handles the fiscal front in his Budget on February 28, and on the continuation of the disinflationary process.

Dr Rajan has kept key policy rates unchanged in the sixth bi-monthly monetary policy. In doing so, he holds out hope for home-loan and other borrowers, indicating that banks will have to cut rates in the near future because of competition from commercial paper that corporates prefer. The statutory liquidity ratio, the money that banks are required to maintain with the RBI before providing credit, has been reduced by half a per cent.

This will release Rs 43,000 crore into the banking system and is to be seen as a nudge to the banks to lend more and cut interest rates. He even said that the banks are quick to cut deposit rates but slow to cut lending rates despite a substantial fall in treasury rates. On NPAs banks now have further flexibility to deal with stalled projects.

Dr Rajan, however, has cautioned that India is in the midst of a competitive disinflationary environment with massive quantitative easing programmes by the ECB, Singapore and Japan, problems in Greece and weakening oil countries. It is also uncertain when the US will increase interest rates. All these factors will make financial markets vulnerable.

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