RBI cuts SLR by 50 bps to 22%, other rates unchanged

The Reserve Bank of India (RBI) on Tuesday announced a 50 basis point reduction in the statutory liquidity ratio (SLR) of scheduled commercial banks from 22.5 per cent to 22.0 per cent of their net demand and time liabilities (NDTL) with effect from the fortnight beginning 9 August 2014.

The cut is expected to release Rs30,000 crore into the system.

The central bank however, kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent and the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of NDTL.

The measures that would help ease liquidity while keeping rates unchanged has been done on the basis of an assessment of the current and evolving macroeconomic situation, RBI stated in a release.

RBI said it would continue to provide liquidity under overnight repos at 0.25 per cent of individual bank's NDTL and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

As per RBI's latest assessment, liquidity conditions in the banking system have remained more or less stable and banks' recourse to liquidity from the LAF, and regular and additional term repos has been around 1.0 per cent of the NDTL of banks, access to the MSF has been minimal and temporary.

In order to offset tightness on account of movements in the cash balances of the government maintained with the Reserve Bank and to manage transient liquidity pressures associated with tax outflows and sluggish spending by the government, the RBI injected additional liquidity aggregating over Rs94,000 crore through nine special term repos of varying maturities during June and July this year.

However, credit offtake, especially export credit has been slow, RBI said. Despite the reduction in the export credit refinance effected in early June, average utilisation of the facility has only been around 70 per cent of the available limit, RBI noted.

The Reserve Bank said it would review existing liquidity arrangements and continue to monitor and manage liquidity to ensure adequate flow of credit to the productive sectors.

On the price front, RBI said a slight easing of retail inflation as measured by the consumer price index (CPI), which eased for the second consecutive month in June. However, prices of vegetables, fruits and protein-based food items continued to remain high.

The decline in CPI inflation was due mainly to the muted increase in the prices of non-food items, particularly those of household requisites and transport and communication, RBI noted.

CPI inflation excluding food and fuel decelerated further, extending the decline that began in September 2013.

However, with some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted.

The RBI also cut the ceiling on debt that must be held-to-maturity by half a percentage point to 24 per cent.

Currently, banks are permitted to exceed the limit of 25 per cent of total investments under the held to maturity (HTM) category provided the excess comprises only SLR securities, and banks' total holdings of SLR securities in the HTM category is not more than 24.5 per cent of their NDTL as on the last Friday of the second preceding fortnight.

In order to enable banks greater participation in financial markets, this ceiling is being brought down to 24 per cent of NDTL with effect from the fortnight beginning 9 August 2014.