RBI keeps interest rates unchanged but injects money via SLR cut

The Reserve Bank of India in its second bi-monthly monetary policy for FY18 kept the interest rates unchanged at 6.25%. However, it reduced the statutary liquidity ratio (SLR) by 50 basis points, effective from fortnight starting June 24. 

The central bank has kept the reverse repo rate unchanged at 6%. 

The central bank has cut Statutory Liquidity Ratio (SLR) by 50 basis points to 20%. SLR is a term used by the RBI for reserve requirement that commercial bank needs to maintain in the form of  government bonds, gold before providing credit to the customers. 

Commenting on the inflation, RBI said that the abrupt and significant retreat of inflation in April from the firming trajectory that was developing in February and March has raised several issues that have to be factored into the inflation projections. 

Giving four factors, RBI said, "First, it needs to be assessed as to whether or not the unusually low momentum in the reading for April will endure. Second, the prices of pulses are clearly reeling under the impact of a supply glut caused by record output and imports. Policy interventions, including access to open trade, may be envisaged to arrest the slump in prices. Third, the accumulated downward adjustment in the prices of petrol and diesel effected in April has been largely reversed on June 1. Fourth, the easing of inflation excluding food and fuel may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand."

ALSO READ: RBI's monetary policy: 12 factors and 10 charts that you must know

Consumer Price Index (CPI) Inflation has cooled sharply recently to 2.99% Year-on-Year (YoY) in April from an average of 4.5% YoY in FY2017, largely on the back of paring of food and core inflation.

Q4 FY2017 GVA growth came in much lower than expectation, printing at 6.1% YoY compared to 6.7% YoY in Q3 FY2017, while GDP growth also declined sequentially to 6.1% YoY from 7.0% YoY in Q3 FY2017.

RBI had projected CPI inflation at 4% and GVA growth by 6.7% at the end financial year 2016-17.

Analysts have been expecting RBI to keep the rates unchanged. However, they were hoping for measures to maintain liquidity.

ALSO READ: RBI's bi-monthly monetary policy: Instead of a rate cut, analysts expect these changes

Naresh Takkar, Managing Director and Group CEO, ICRA had said, “The MPC may choose to observe the actual progress of the monsoon and the adjustment during the transition to the GST, prior to reducing the policy rate or reversing the stance back to accommodative from neutral. Therefore, we expect the MPC to opt for a pause in the June 2017 policy review."

Kamalika Das and  Sumedha DasGupta, analysts of ICICI Bank had said, "Since only one month’s inflation data for the current fiscal (April 2017) will be available when the MPC meets, the Committee may refrain from changing its stance on inflation. However, any further soft prints on both the inflation and growth fronts may give the MPC occasion to re-evaluate their policy stance."

Further, Das had said, "We expect some liquidity management measures to be announced in the August policy, if not in the upcoming one."

Net absorption of liquidity from banking system has been declining and is at Rs 57,300 crore by end of May 2017 compared to Rs 1,06,700 crore in April 2017 and Rs 1,84,000 crore in March 2017. 

As on June 02, 2017, reverse repo flows stands at Rs 402,612 crores. Care Ratings had said, "Therefore, a decrease in Cash Reserve Ratio (CRR) from the current level of 4% seems unlikely."