<div>The central bank held interest rates steady at 7.75 per cent on Tuesday after easing monetary policy just three weeks ago, leaving its next move probably until after the government presents its annual budget at the end of this month.</div><div> </div><div>Instead, the Reserve Bank of India cut the statutory liquidity ratio (SLR) - or the amount of bonds that lenders must set aside - by 50 basis points to 21.5 per cent of deposits from Feb. 7, prodding banks to increase lending.</div><div> </div><div>"Banks should use this headroom to increase their lending to productive sectors on competitive terms so as to support investment and growth," the RBI said in a statement.</div><div> </div><div>The RBI also announced a slew of initiatives to develop markets, including allowing foreign institutional investors to re-invest government bond coupons even when their investment limits are exhausted.</div><div> </div><div>Most economists in a poll had expected the Reserve Bank of India to keep its repo policy rate steady, and reduce rates later so long as the budget, due to be unveiled by Finance Minister Arun Jaitley on Feb. 28, does not disappoint in terms of reducing the fiscal deficit.</div><div> </div><div>The RBI said in its statement that it wanted more comfort that inflation would continue to ease and that it would await action from the government regarding the country's finances.</div><div> </div><div>"Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest stance," the central bank said.</div><div> </div><div><div>Radhika Rao, an economist at DBS, Singapore, said: "The tone of the accompanying statements was dovish, but cautious, highlighting two aspects a) fiscal slippage ... b) an acknowledgement of the shift in global dynamics and undercurrents of a renewed push to depreciate currencies."</div><div> </div><div>"This also reflects the RBI's disdain with quantitative easing programs (as ECB joined the bandwagon, just as the US Fed bowed out) and the associated risks to financial stability and asset markets."</div></div><div> </div><div>Comforted by falling world oil prices and inflation slowing, the RBI had surprised investors with 25 basis points cut in the repo rate on Jan. 15, even though investors were expecting the central bank to embark on an easing cycle at some point during the early months of the year.</div><div> </div><div>The RBI clearly saw little point in waiting any longer to reduce borrowing costs in an economy that was struggling to gather momentum.</div><div> </div><div><div>The decision was led by falling inflationary expectations and data on weak commodity prices and muted rural wage growth, <span style="line-height: 15.3999996185303px;">Governor Raghuram Rajan</span><span style="line-height: 15.3999996185303px;"> said.</span></div><div> </div><div>"Having committed in public statements to initiate a change in the monetary policy stance as soon as incoming data permitted, the Reserve Bank cut the policy rate on January 15," he said.</div></div><div> </div><div>Markets are pricing in more interest rate cuts over the rest of the year given inflation is expected to remain subdued on the back of a plunge in global crude prices and bigger-than-expected falls in domestic vegetable and fruit prices.</div><div> </div><div><div>Deven Choksey, managing director, KR Choksey Securities, said: "I think the policy was more in line with the expectations. The 50 basis points cut in SLR is symbolic, but I think it is a positive move. This will provide additional liquidity for banks and will help banks to increase lending."</div><div> </div><div>"We do expect the RBI will reduce the rates sooner, which will fuel growth in core sectors like infrastructure and manufacturing."</div></div><div> </div><div><strong>Inflation</strong></div><div>Consumer prices rose 5 per cent in December, well within the RBI target of 6 per cent by January 2016.</div><div> </div><div><div>On inflation, the policy document took consolation in the declining trend and noted that even the upturn in December turned out to be muted relative to projections.</div><div> </div><div>"Heightened volatility in global financial markets, including through the exchange rate channel, also constitute a significant risk to the inflation assessment. Looking ahead, inflation is likely to be around the target level of 6 per cent by January next," it said.</div><div> </div><div>Despite fiscal deficit touching 99 per cent by November, the governor said he was confident that the government will not miss the budgeted 4.1 per cent target.</div><div> </div><div><div><strong>Revision In GDP Growth</strong></div><div>Referring to economic growth, the RBI said that though revision in the base year for GDP and calculation methods will mean some revision in GDP growth numbers for 2014-15 as well as in the forecasts, growth expectations should be tempered.</div><div> </div><div>"Domestic activity is likely to have remained subdued in Q3 of 2014-15, mainly reflecting the shortfall in the kharif harvest relative to a year ago but agricultural growth is likely to pick up in Q4 with the late improvement in the north-east monsoon and in rabi sowing. Nevertheless, growth expectations should be tempered as lead indicators such as tractor and motorcycle sales and slowing rural wage growth all point to subdued rural demand," the RBI document said.</div><div> </div><div>However, it noted that there is improvement in business confidence as visible from a pick-up in new investment intentions, especially in transportation, power and manufacturing.</div><div> </div><div>The RBI estimated the current account deficit (CAD) for 2014- 15 at 1.3 per cent of the GDP, significantly lower than the earlier projection.</div><div> </div><div>"The CAD has been comfortably financed by net capital inflows, mainly in the form of buoyant portfolio flows but also supported by foreign direct investment inflows and external commercial borrowings. Accordingly, there was accretion to India's foreign exchange reserves to the tune of $6.8 billion in Q3," the RBI said.</div><div> </div><div>(Agencies)</div></div></div>
