RBI keeps rates stable, infuses liquidity

India Inc. and the banks breathed a sigh of relief on Thursday as not only did the Reserve Bank of India not increase any of its policy rates, it also produced a pleasant surprise in the form of a cut of one per cent in the statutory liquidity ratio (SLR), the amount that banks have to keep aside before lending. This means that borrowing will not get expensive. Rising interest rates have been a problem for India Inc.

Together with the reduction in the SLR and the open market operations buyback of `48,000 crore, the RBI has eased the liquidity position in the banking system which will see an additional `48,000 crore.
The banks were having a problem with deposits falling and credit demand increasing and many of them had increased deposit rates in order to attract deposits.
The RBI in its mid-quarter monetary policy review, however, warned that inflation is still a major concern and Thursday’s provision of liquidity “should not be construed as a change in monetary policy stance since inflation continues to remain a major concern”. The measures taken in this review need to be appreciated in that context. This sets the tone for the January mid-term review due on January 25.
Most analysts see the Central Bank raising rates in January by 20 to 25 basis points. Mr Naresh Takkar, managing director, ICRA Ltd, said, “With the Central Bank reiterating its concerns regarding the elevated inflation levels, and based on our projections for headline inflation, we expect that the Reserve Bank of India may increase policy rates by 25-50 basis points in Q4 2010-11.”

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