Central bank holds repo rate, stays accommodative

Reserve Bank of India (RBI) Governor Raghuram Rajan cited the April retail inflation “surprise” as the key factor that prompted the central bank to leave interest rates unchanged on Tuesday.

The central bank chief said the RBI was also committed to providing liquidity as required by the banking system and observed that the Centre could also aid credit flows through a timely infusion of capital into “constrained” public sector banks.

On growth, the central bank said some high frequency indicators for April point to a firming recovery, although it is still uneven.

The central bank said the transmission of the monetary policy as well as timely capital infusion in the banks remained critical for growth to revive. Banks have been reluctant to cut lending rates which prompted the central bank to ask banks to shift to a new loan pricing mechanism — Marginal Cost of funds based Lending Rate (MCLR) from April. Mr. Rajan said the RBI will review the implementation of the new framework .

The RBI also said there could be outflows of about $20 billion once the foreign currency non-resident (bank) deposits, which were garnered during the 2013 currency crisis, mature.

While the RBI has covered those requirements in the forward markets, Mr. Rajan said there could still be a shortage of dollars and assured market participants of dollar supply in case of extreme volatility.

He however warned that the supply of dollars by the central bank should not be taken ‘for granted’.

On the issue of cleaning up of banks’ balance sheets, Mr. Rajan reiterated that the central bank will not reconsider any kind of regulatory forbearance.

He said the RBI is in discussion with the government to facilitate flow of credit to projects with appropriate capital structures.

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Source:Thehindu

RBI