In order to infuse additional liquidity, Rajan decreased SLR for banks by 0.50 percent to 22 percent with effect from the fortnight beginning August 9.
Mumbai: Giving no respite to borrowers, Reserve Bank for the third time in a row kept the key policy rate unchanged saying that it has to remain vigilant to the impact of deficient monsoon on the price situation.
RBI Governor Raghuram Rajan, however, lowered the Statutory Liquidity Ratio, the portion of deposits that banks are required to keep in government bonds, by 0.5 percent to unlock about Rs 40,000 crore into the system.
Finance Ministry on its part suggested that going forward the RBI should examine the liquidity situation, inflation and growth while fixing the policy rate.
"The Governor, RBI has already stated that RBI will not hold interest rates high any longer than is necessary and if disinflation proceeds as warranted, there will eventually be room to cut rates," the statement said.
Bankers said the RBI status quo does not provide room to cut interest rate and hence the EMIs for home and auto loans will remain the same. Industry chambers voiced disappointment saying RBI should have cut the rate to boost growth.
Rajan said there are upside risks to inflation in view of uncertain monsoon and its impact on food production as also volatile international oil prices.
"It is...Appropriate to continue maintaining a vigilant monetary policy stance as in June, while leaving the policy rate unchanged," he said at the third bi-monthly review of the monetary policy here.
Accordingly, the repo rate will continue to stand at 8 percent, the reverse repo at 7 percent and the cash reserve ratio at 4 percent. The bank rate would remain at 9 percent.
In order to infuse additional liquidity, Rajan decreased SLR for banks by 0.50 percent to 22 percent with effect from the fortnight beginning August 9. A similar move in June had released an additional Rs 40,000 crore into the system.
Markets appeared to have reacted positively to the RBI policy. Benchmark Sensex rose by 185 points as investors cheered RBI's move to give more funds to banks for lending. The rupee also ended nine paise higher at 60.84 against the US dollar.
Rajan hinted at more SLR cuts in the future in tandem with the government actions on the fiscal deficit front to help lenders plan for the long-term.
Commenting on RBI action, Oriental Bank of Commerce Chairman and Managing Director S L Bansal said, "interest rates are unlikely to come down in the near future. The status quo would continue for some time."
CII Director General Chandrajit Banerjee said, "At a time when industrial growth continues to be sluggish, CPI-based inflation is moderating and above all, inflation risks are gradually abating due to improvement in monsoon conditions, the RBI could have taken this opportunity to effect a cut in interest rates."
Rajan said the SLR cut is not aimed at a reduction in the lending rates but is more of a tool to help banks plan better.
RBI is concerned about the growth but wants to first take inflation down to have long-term sustainable growth, he said.
"The RBI in no way will hold rates high any longer than necessary. There is a path we are trying to achieve, and we want to achieve that path. We are not against growth, but we do think that growth will be most benefited if we dis-inflate the economy," said Rajan, known as inflation hawk.
"This is an anti-inflation fight, let us win it and that will create the best conditions for sustainable growth," added Rajan, who has raised the key rates thrice since assuming office last September to rein in inflation.
On the intent of the policy action, Rajan said the central bank is trying to enhance the supply side of the economy by providing adequate liquidity, even while arresting any demand side pressures by bringing down the cost of funds by cutting lending rates.
With regard to retail inflation, which cooled down to 7.31 percent in June, Rajan said that while achievement of the 8 percent target for January 2015 is not a worry, there are "upside risks" to its ambitious target of lowering it further to 6 percent by 2016.