The cut in statutory liquidity ratio will take effect from the fortnight beginning August 9, 2014. The central bank also decided to provide liquidity under overnight repos at 0.25 percent of bank-wise NDTL (net demand and time liquidities) and liquidity under 7-day and 14-day term repos of up to 0.75 percent of NDTL of the banking system. On the cash reserve ratio (CCR), the bank keep it of scheduled banks unchanged at 4.0 per cent of NDTL. Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 percent.
Excerpts from the statement by Dr. Raghuram G. Rajan, Governor:
The moderation in CPI headline inflation for two consecutive months, despite the seasonal firming up of prices of fruits and vegetables since March, is due to both base effects and the steady deceleration in CPI inflation excluding food and fuel. The recent fall in international crude prices, the benign outlook on global non-oil commodity prices and still-subdued corporate pricing power should all support continued disinflation, as should measures undertaken to improve food management. There are, however, upside risks also, in the form of the pass-through of administered price increases, continuing uncertainty over monsoon conditions and their impact on food production, possibly higher oil prices stemming from geo-political concerns and exchange rate movement, and strengthening growth in the face of continuing supply constraints. Accordingly, the upside risks to the target of ensuring CPI inflation at or below 8 percent by January 2015 remain, although overall risks are more balanced than in June. It is, therefore, appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged.
Prospects for reinvigoration of growth have improved modestly. The firming up of export growth should support manufacturing and service sector activity. If the recent pick-up in industrial activity is sustained in an environment conducive to the revival of investment and unlocking of stalled projects, with ongoing fiscal consolidation releasing resources for private enterprise, external demand picking up and international crude prices stabilising, the central estimate of real GDP growth of 5.5 percent within a likely range of 5 to 6 percent that was set out in the April projection for 2014-15 can be sustained. On the other hand, if risks relating to the global recovery, the monsoon and geo-political tensions intensify, the balance of risks could tilt to the downside.
The Reserve Bank will continue to monitor inflation developments closely, and remains committed to the disinflationary path of taking CPI inflation to 8 percent by January 2015 and 6 percent by January 2016. While inflation at around 8 percent in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term. The balance of risks around the medium-term inflation path, and especially the target of 6 percent by January 2016, are still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialise. In the months ahead, government actions on food management and to facilitate project completion should improve supply, but as consumer and business confidence pick up, aggregate demand will also strengthen. The Reserve Bank will act as necessary to ensure sustained disinflation.