The Reserve Bank of India (RBI) kept its key policy rate on hold on Tuesday, but eased rules to spur bank lending in a move set to be welcomed by the new pro-business government as it seeks to revive economic growth.
The RBI also hinted it would not raise interest rates further as long as inflationary pressures continued to ease.
Governor Raghuram Rajan kept the key policy rate unchanged at 8 per cent, as widely expected, but reduced the mandatory amount of bonds lenders must park at the RBI - called the statutory liquidity ratio - by 50 basis points to 22.5 per cent of deposits, starting in mid-June. (Read: Sensex Choppy as RBI Holds Repo Rate; SLR Cut Boosts Banks)
"The decisive election result, together with improved sentiment should ... create a conducive environment for comprehensive policy actions and a revival in aggregate demand as well as a gradual recovery of growth during the course of the year," Dr Rajan said in the RBI statement.
"If the economy stays on this course, further policy tightening will not be warranted," he said referring to the moderating inflation trend.
The benchmark 10-year bond yield briefly rose 5 basis points or 0.05 per cent to 8.70 percent after the SLR cut announcement, but retreated on the back of a dovish tone in the policy. (Also read: RBI Increases Individuals' Spending Limit Abroad)
Economists in a Reuters poll had overwhelmingly expected the RBI would keep India's policy repo rate on hold, after last raising interest rates by a quarter percentage point in January.
The pause comes as Dr Rajan is showing some success in bringing down consumer price inflation (CPI) after raising interest rates by a total of 75 basis points or 0.75 per cent since September.
Except for an increase in April to 8.59 per cent, retail prices have cooled in 2014 from the near 10 per cent level in the two previous years.
Dr Rajan will now have to sell his agenda - which puts priority on the fight against inflation - to the government headed by new prime minister, Narendra Modi, while taking steps to help it boost growth.
In turn, investors are hopeful the new government will respond by narrowing the fiscal deficit and tackling the supply-side factors that drive up food inflation in India, thus easing the burden on the poor and restoring investors' confidence.
Analysts say such a concerted effort by the government could help the RBI meet its target to bring down CPI inflation to 8 per cent by January 2015 and 6 percent the following year.
Copyright: Thomson Reuters 2014
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
